Inversions Hurt Individual Investors, Too

Taken from gated post from Vanguard Fund Adviser:

Inversions Hurt Individual Investors, Too

As U.S. corporations move offshore to potentially avoid billions in U.S. taxes, they are sticking their shareholders with an unexpected tax burden over which investors have no control.

The Joint Commission on Taxation, a non-partisan congressional research panel, estimates that the U.S. stands to lose as much as $19.5 billion in tax revenues over the next decade if corporate “inversions” are allowed to continue. Yet, while U.S. corporations will gain—by exploiting a loophole to avoid paying billions in U.S. taxes if their deals are successful—shareholders stuck footing a tax bill on capital gains stand to lose.


This is complicated stuff, so let’s take a real-world example. Consider the recent $28 billion merger between Dublin’s Activis PLC and U.S.-based Forest Laboratories, which closed on July 1. When Forest reincorporates in Ireland, its shareholders will owe capital gains on their Forest shares.

(For example) Vanguard’s massive 500 Index Fund owned, collectively, 2,468,154 shares of Forest Labs at the end of June, the day before the transaction closed. The gain in Vanguard’s position based on Forest’s average price could be $146.7 million dollars, though it could be even higher or lower thanks to the invisibility factor. On that $146.7 million gain, shareholders in the fund could collectively owe as much as $29.3 million in taxes. And that’s just one fund. To be clear, investors in IRAs and other tax-exempt accounts aren’t liable for the tax hit.