Inversions are on the rise as companies look to save on taxes. But shareholders will still pay.
Depending who’s doing the talking, US corporations are either being savvy tax planners or unpatriotic ne’er-do-wells when they embark on a merger known as an inversion. The current in-the-works Burger King-Tim Hortons tie-up is the most recent example of the practice of a US company acquiring or merging with a foreign company, then using that company’s mailing address to avoid paying US taxes.
According to reports, since January 2013, about 20 companies have announced plans to reincorporate overseas for tax purposes. Overall, 76 companies have inverted since 1983, according to the Congressional Research Service. The US Treasury department says companies will avoid paying about $19.5bn in taxes over 10 years.
However, just because the company moves and avoids taxes, it doesn’t mean shareholders get the same benefit. That’s because dividends paid by foreign companies listed in the US still hold qualified dividend status on par with those made by domestic companies; as such, shareholders still have to pay capital gains taxes (the amount of which depends on the shareholder’s tax bracket).
And according to financial information services company Markit, dividends paid by foreign companies listed in the US are on the rise. “There are currently 27 constituents of the S&P 500 index which hold a foreign tax domicile. Of these 27 firms, 25 are forecasted to make a dividend payment to shareholders in the coming fiscal year,” according to Markit Dividend Forecast. Markit says these payments are expected to total $14.1bn for the coming fiscal year, up 23 percent over last year’s total. Markit says Schlumberger is again expected to lead the way as its payment is forecasted to jump by $424m in the coming fiscal year.
So Uncle Sam will still get a little something for somebody else’s efforts.
Source: Markit Dividend Forecast