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Effective Tax Rate Changes and Earnings Stripping Following Corporate Inversion

Seida, Jim A. and Wempe, William F.

Abstract:

We examine the financial and valuation consequences of corporate inversion using a sample of 12 inversion firms and 24 matched firms. We find that firms' effective tax rates (ETRs) decline substantially following inversion. Based on pre– to post–inversion changes in foreign profit margin, U.S. profit margin, and the geographic composition of pre–tax income, we infer that inversion–related ETR reductions are due to U.S. earnings stripping. For four firms, we provide evidence that intercompany debt is the mechanism used to strip earnings. Finally, we find that abnormal returns at shareholder approval dates are associated with inverted firms' realized ETR changes.

Citation

Seida, Jim A. and Wempe, William F. (2004), Effective Tax Rate Changes and Earnings Stripping Following Corporate Inversion, National Tax Journal, 57:4, pp. 805-28

DOI: dx.doi.org/10.17310/ntj.2004.4.02