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02 September 2014

Why big business is moving 

Businesses and financial interests around the world are watching with concern as US lawmakers address the growing trend of “corporate inversions," by which companies reincorporate in another country to reduce their tax liability, usually by merging or acquiring a partner abroad.

A host of American firms are attempting such transactions, notably pharmaceutical giant Pfizer, which is looking to transform into a British firm by acquiring a company in the UK, and fast-food chain Burger King, which hopes to buy Canadian coffee brand Tim Hortons.

The issue is tied to a broader concern about international groups using complex corporate structures to minimize their tax bills.

While American critics have decried inversions as attempts by large corporations to avoid paying their fair share of taxes at home, the reality, unsurprisingly, is often more nuanced.

Consider Italy's Fiat, which is creating a new corporate structure as part of its absorption of US auto manufacturer Chrysler. It plans to establish tax residency in the UK while moving its corporate head office to the Netherlands and conducting an IPO on the New York Stock Exchange.

The new Fiat Chrysler Automobiles NV will become the world’s seventh-largest carmaker and plans to boost sales from 4.4 million in 2013 to 7 million in 2018. However, the challenges confronting the combined group are formidable in an ever more competitive automobile marketplace.

Tax treatment is important to companies like Fiat Chrysler. The group is expected to pay less tax in the UK, where the corporate tax rate is 21% compared to Italy’s 31%. In addition, non-Italian Fiat shareholders can receive dividends tax-free, instead of being subject to a domestic dividend tax of up to 26%.

But tax is far from the only factor dictating corporate structure and choice of domicile, especially for groups with operations throughout the world. Arguably, the most important facet of the new structure will be the New York listing, enabling the group to tap US capital markets to finance its ambitious expansion plans.