Tags: Sloan | inversion | tax | invest

Fortune's Sloan: Corporate Inversions Aren't Good for Retail Investors

By    |   Friday, 12 September 2014 10:39 AM

Here's another reason to hate corporate inversions.

Corporations use inversions to cut their tax bills by relocating their headquarters abroad. In transactions largely on paper, they typically acquire a smaller, foreign company, and reincorporate to move its address to its location.

The company doesn't pay any exit tax when it moves its headquarters to a country with a lower corporate tax rate. But its retail shareholders must pay capital gains tax as if the company was sold for cash at its market price, according to Fortune magazine's Allan Sloan.

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That can be a substantial amount, especially for long-term investors, Sloan argues.

The company's top executives and board members usually avoid that burden, he says. They typically receive special payments to cover excise taxes on their restricted shares and options when the inversion occurs.

For example, Medtronic, a Minnesota-based medical-device company considering inversion, estimates it will shell out $63 million to its executives and board members to pay their taxes.

Other shareholders, however, will pay taxes on their shares. A Minnesota resident in a top income bracket who owned shares of Medronic for 20 years would pay approximately $20 a share in federal and state taxes, Sloan estimates.

Mutual fund and hedge fund managers aren't burdened by such taxes. Their investors pay the tax bills. Ratings on their management skills are based on pre-tax performance.

Wall Street firms win lucrative fees through inversions, Sloan adds. The inversion schemes give hedge funds and other institutional investors a quick boost to their investment performance that helps them draw larger fees and more money from investors.

"Once again, Wall Street gets its way, while responsible Main Street folks get screwed," Sloan declares. "Let's stop this inversion farce now, fix the damn corporate tax code and get back to the business of growing our economy and improving our lives."

Although inversions are widely criticized, Congress is unlikely to pass legislation any time soon, according to Politico.

The issue has turned out to be a dud for Democrats, according to Politico.

Despite Burger King's plan to use an inversion, polls indicate the public is generally unaware of the issue and doesn't really understand it. People disapprove of the practice once it's explained to them, however.

"It hasn't really broken through as an issue yet, though the Burger King transaction could be a milestone in that it's a very recognizable American company," Michael Ramlet, founder and publisher of polling firm Morning Consult, tells Politico.

Editor’s Note: New Warning - Stocks on Verge of Major Collapse

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Here's another reason to hate corporate inversions.
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2014-39-12
Friday, 12 September 2014 10:39 AM
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