Corporate Inversion Transactions: Valuation Considerations

The general policy trend to free trade has increased competition for corporations to adopt more efficient production as previously closed economies reduce tariffs and other trade barriers. That competition has also led multinationals to acquire productive assets around the world in an ever greater search for reduced costs. Countries have responded by also reducing corporate tax rates, leaving some countries, such as the United States, with significantly higher rates.

A natural consequence of that trend is that merger candidates in low-tax jurisdictions have become more attractive. The result is tax base erosion as mergers shift corporate headquarters away from high-tax jurisdictions through the use of corporate inversions. These transactions have led to scrutiny by tax authorities around the world. This article examines economic issues that arise when tax authorities examine corporate inversions.