AMERICAN companies are on the move. On August 6th CF Industries, a fertiliser manufacturer, and Coca-Cola Enterprises, a drinks bottler, both said they would move their domiciles to Britain after concluding mergers with non-American firms. Five days later Terex, which makes cranes, announced a merger which will involve moving its legally recognised headquarters from Westport, Connecticut, in New York’s tri-state area, to the tiny town of Hyvinkää, Finland. What’s driving these firms to pack up and go? For more than 30 years companies, especially American ones, have been merging with foreign firms or acquiring them outright in order to shift their tax bases abroad. It started in 1982, when McDermott, a construction company, outsmarted America’s Internal Revenue Service (the IRS) by moving its base from New Orleans to Panama, where it had a subsidiary. Ever since, this kind of move, called a “corporate inversion”, has been an attractive way for American companies with overseas earnings to reduce their tax bills. Because the American taxman has unusually long arms, companies based in the United States who earn profits abroad can end up with piles of cash “stuck” overseas: earnings that face hefty corporate taxation the instant they are brought to America (for example to pay staff or to invest). An inversion might not affect a company’s day-to-day operations, but by changing the country of domicile officially, it can offer a way out. Since this means less revenue for Uncle Sam, the American government has been trying to desperately stop companies from fleeing and taking their revenue with them. But only rarely has the government been fleet-footed enough to catch them.

Pulling off a successful inversion requires only a modest sleight of hand. When company A (based in America, say) acquires company B (based in Ireland) the managers of the combined A+B entity get to choose a domicile. If they choose the United States, they are in effect choosing to pay relatively high American corporate rates—up to 39%—on all the overseas profits they repatriate; unusually, the IRS taxes income on a global basis. If they choose Ireland instead, they will have to pay a much lower tax rate (12.5%) on profits generated in Ireland, but the crucial bit is that they will pay only the local rate on whatever profits are generated in foreign subsidiaries—because Ireland, like most other countries, taxes on a strictly territorial basis. That means paying, for example, 39% on profits generated within the United States, 20% in Britain, or 0% in Bermuda. A third option is to choose a neutral country, such as Britain or the Netherlands which, like most of the world, also have lower rates and a territorial system. Few global companies would choose to stay in America given that choice, though plenty remain based there, often for publicity reasons. Walgreen’s bosses abandoned plans to move to Europe last year, but only after calls for a consumer boycott. The IRS managed to tighten some rules in September, which seems to have made it slightly harder for other companies to invert.

But simply making it harder to leave is surely not the answer. It has the effect of increasing the chances of hamstrung American firms being swept up by foreign rivals. This has already happened to American targets valued at $315 billion, all sold to foreigners this year, on the calculations of S&P Capital IQ, a data provider. So long as America’s tax code is out of kilter with the rest of the world, its firms will find reason to sail for fairer shores, whether the IRS likes it or not.

Dig deeper:

All my bags are packed (Aug 2015)

Inverted logic (Aug 2015)

How to stop the inversion perversion (Jul 2015)