In this short paper, you will consider a tax inversion scenario and write a memo explaining the pros or cons related to the scenario based on tax research.

Prompt: Read Tax Strategy and Corporate Reputation. Imagine your client would like to complete a tax inversion, acquiring a foreign company in Switzerland and moving the domicile of the combined company overseas. Your client believes that this will save him or her quite a bit of money in taxes as the corporate tax rate in Switzerland is 5%. Write a memo explaining why this would or would not be a good idea. Keep in mind the document linked above. Also, provide examples of tax inversions that have occurred in the past couple of years and whether they were achieved or not.

In your paper, address these critical elements:

• Identify sources for evaluating the appropriate tax situation.
• Document research performed to determine if tax inversion is advisable in this scenario.
• Apply research to tax inversion and determine best course of action.
• Document findings and advice in a memorandum to the client. Include supporting details and examples

CLIENT CORRESPONDANCE

DATE: March 1, 2021

SUBJECT: Tax Inversion, US to Switzerland

You expressed an interest in a potential tax inversion to Switzerland, given that country’s 5% corporate tax rate. We do not commend this transaction.

First, the effective tax rate in Switzerland is not significantly less than the US combined federal and state tax rate. Corporations doing business in Switzerland are subject to an 8.5% federal income tax as well as income taxes imposed by the canton in which the business activities are incurred. The current tax rates in the various Swiss cantons range from 11.9% to 21.6%. This results in an effective combined Swiss tax rate of 19.7% to 29.4%. The US combined federal and state effective corporate income tax, assuming a state tax rate as high as 10% is 21% to 28.9%.

Second, the Internal Revenue Code will reduce and potentially eliminate the benefit of the corporate inversion if three tests are met:

- If the Swiss company acquires substantially all of the properties held directly or indirectly by your US corporation

- After the acquisition, at least 60% of the stock of the Swiss corporation is held by the former shareholders of your US corporation, and

- The resultant combined business doesn't have substantial business activities in Switzerland. In order to have substantial business activities in the foreign country, you will need to have at least 25% the total number of employees, at least 25% of the total employee compensation, at least 25% of the value of the combined group’s assets, and at least 25% of the combined group’s income derived in Switzerland. The foreign corporation must also be a tax resident of Switzerland.

You would need to structure the transaction very carefully to ensure that at least one of these tests is not met.

Lastly, you should also be aware of the potential reputational risk of such a transaction. Inversion transactions have been scrutinized by the public, the media and customers of companies that have announced their intention to do so. For example, it is believed Walgreen Co canceled its 2014 plan to move its tax domicile overseas due to the complexity and heightened political sensitivities of the transaction. Two other larger inversions also were curtailed (Pfizer and Omnicom Group) that year.