A Brief but Sad History of Selected Corporate Inversions

Earlier this week, we were greeted with the news that Burger King, a U.S. fast-food giant, is in talks to merge with Tim Hortons, a much smaller Canadian fast-food chain, and become a Canadian firm. This proposed deal is interesting on many levels. First, it is another example of a corporate inversion in which, to use Edward Kleinbard’s description, a “foreign minnow swallows a domestic whale.”

Second and more importantly, this is a corporate inversion involving a large U.S. corporation and a much smaller foreign corporation that was once a U.S. corporation. Yes, you read that correctly: Tim Hortons was a U.S. corporation prior to its inversion to Canada in 2009. Though to be fair, Tim Hortons started as a Canadian company—it was founded in Hamilton, Ontario in 1964. Wendy’s restaurant chain purchased Tim Hortons in 1995 and then spun-off the company in 2006. Tim Hortons inverted to Canada in 2009 arguing that they had substantial business activity in Canada.

This is not the first instance of a U.S. multinational seeking to become a foreign firm by purchasing a foreign firm that was once a U.S. firm. Ohio-based Eaton Corp “moved” to Ireland in 2012 by acquiring Cooper Industries. Cooper Industries, however, was a Texas-based company until it inverted in 2002 to Bermuda, a well-known tax haven; its administrative headquarters, however, remained in Texas. Worried that proposed antitax-haven legislation would designate many firms located in tax havens as U.S. corporations for tax purposes, Cooper Industries again “moved” in 2009, this time to Ireland.

Medtronic, a Minnesota-based medical device manufacturer, is shifting its home to Ireland by buying Covidien, an Irish medical device maker. What is not well known is Covidien was, until 1997, a U.S. corporation known as Tyco Healthcare and part of Tyco International. In 1997, New Jersey-based Tyco inverted to Bermuda. After the Tyco CEO Dennis Kozlowski was dumped (and eventually convicted of grand larceny), the new Tyco management spun-off Tyco Healthcare as Covidien. In 2010, Covidien relocated to Ireland, apparently for the same reason as Cooper Industries.

A sad part of inversion stories is the U.S. tax code allows U.S. corporations to move their tax home to a tax haven by merging with a small foreign firm and keep their administrative headquarters in the U.S. But sadder still is the U.S. tax code also allows this kind of merger to be with a “foreign” firm that has its administrative headquarters in the United States and used to be a U.S. corporation—U.S. corporations are becoming foreign corporations by merging with ostensibly U.S. corporations! The time is certainly ripe for Congress to revisit the anti-inversion rules put into the tax code in 2004 to prevent further erosion of the corporate tax base.