Governments are quite powerless on tax inversion

In recent years, tax inversion – re-incorporating a company overseas in order to reduce the tax burden on income earned abroad – has become a central issue for advanced economies’ governments which seek to create jobs and fund their ever-growing public deficit. New legislation is being envisaged in a number of OECD countries with a view to reducing opportunities for big companies to benefit from tax inversion.

However, political pressure’s effectiveness mainly appears to depend on whether you are powerful or miserable. Analysts considered that the Pfizer-Allergan USD 160 billion merger failed because of the US Department of Treasury’s new rules against tax-inversion strategy, conversely the French government could be forced to renounce to its 50-year-old and never enforced plan of limiting the remuneration of top CEOs lest they leave the country and relocate elsewhere.

French oil giant Total’s CEO Patrick Pouyanné told French Senators that firms could indeed move out of France if the government passed laws to limit business executives’ remuneration. Meanwhile French group Technip announced it will relocate its headquarters to London as a result of its merger with US competitor FMC. Beyond fiscal considerations, the global economic environment and the levels of productivity also weigh in big companies’ decision to move out of a specific country.

In absence of any international legislation that could concretely limit big companies’ interest in relocating, national legislations should remain quite powerless. What can governments really do against multinationals that argue in favor of tax inversion as a competitive advantage while the same governments support free trade and globalization?