While taxes may not be the sexiest topic in finance (unlike, say, “corporate raiders,” easily the coolest name in the industry), tax inversion has come to the forefront of both the financial news media and the political dashboard in recent months.

First, we need a working definition. Tax inversion is the acquisition of a typically smaller foreign entity by a U.S. company with the express purpose of lowering, but not eliminating, their U.S. tax obligations. Oftentimes U.S. companies acquire foreign firms in order to strengthen global market share, increase integration across business units and diversify their operations. Tax inversion is designed to limit the company’s earnings’ exposure to the 35 percent federal corporate tax rate in the United States, one of the highest of Organisation for Economic Cooperation and Development countries, by reincorporating headquarters in a location with lower top corporate income taxes, typically Ireland, Switzerland, the Cayman Islands and other relative tax havens. Historically, when inversions take place, despite the headquarters having nominally been moved, most operations management still takes place in the United States.

Since the government still taxes earnings inside the U.S., as well as profits of foreign divisions of U.S.-based companies entering the country, simply buying a foreign company to use as a tax shelter is usually not enough to dodge the tax bill. After merging, some companies engage in earnings stripping, a process involving the foreign entity lending money to the American entity (both parts of the same company). The American company can then deduct from its tax bill the interest payments it is making on the debt,  reducing the degree to which its profits can be taxed. This sum is added to the savings achieved by keeping profits earned abroad outside the United States as well as the existing loopholes in the tax code.

Companies have been inverting their tax structures for decades, but only in recent months has there been a strong enough public outcry to warrant a discussion at the federal regulatory level. Earlier this year, Illinois pharmaceuticals manufacturer AbbVie Inc. declared its intentions to merge with Shire, a similar pharmaceutical company headquartered in Ireland and incorporated in the British island tax haven of Jersey. While this move would help expand AbbVie’s product line, according to Bloomberg it would also decrease its effective tax rate in the U.S. from 22 percent to 13 percent, a significant amount considering AbbVie’s net income of over $4 billion in 2013 on over $18 billion of revenue. More recently still, Burger King announced plans to buy Tim Horton’s and relocate its headquarters to Canada, where Tim Horton’s is located, shaving its tax bill by over a quarter.

Inversions of such successful or well-known companies such as these have prompted officials in the federal government to reassess the conditions that allow companies to complete these restructurings. At the end of August, Treasury Secretary Jack Lew announced that the Treasury was going to re-examine whether or not it had the legal authority to act on its own and if so, alter the limits to make it more difficult for a merged company to shirk its tax liability. Others, such as the Economist, have argued that tax inversion is the symptom, not the problem, and that the real danger to U.S. economic interests is the dizzyingly complex U.S. tax code, where top companies are theoretically liable for 35 percent plus the average state and municipality taxes, typically around 4 to 5 percent.

So how does this issue affect the average Georgetown student? For example, if Burger King inverts itself and relocates to Canada, there will be no immediate effect. Whoppers will still be served and life will go on. However, over time, there will be wider financial effects. On the positive side, Burger King (and by extension, its loyal customers) will have a lower tax burden, increasing profits if all else holds equal. This could mean less vulnerability to price increases. On the other hand, there are a few more negative implications, particularly if you are an American shareholder. First, the government receives a lower corporate tax receipt, the cumulative effect of which across all inversions is estimated to be $20 billion over the next decade by the Treasury Department. Second, shareholders are charged a capital gains tax when the company reconstitutes itself. Therefore, the private shareholder and the federal government bear the financial burden of the company moving abroad. Your Whopper’s not going anywhere, but the King certainly is.

Sean Sullivan is a senior in the McDonough School of Business. 37th & Wall St. appears every month.

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