Recently, Medtronic (NYSE:MDT) and Covidien (UNKNOWN:COV.DL) became the latest pair of companies to consider a high-value merger. One of the big motivations for these international mergers is the opportunity to do a tax inversion. But what exactly is a tax inversion, and why have they become so popular?
In the following video, Dan Caplinger, The Motley Fool's director of investment planning, looks at tax inversions and the big rise in their popularity. Dan notes that U.S. corporate tax rates are high, with rates of 35% being much higher than in other areas. Tax inversions allow companies to shift their tax home to a foreign country where taxes are lower, and estimates suggest that the new wave of tax inversions costs the IRS about $2 billion annually in lost taxes. Dan points out that Congress has made it harder for companies to do tax inversions, but the limitations on minimum size for international target companies has led to megamerger proposals like Pfizer (NYSE:PFE) and its now-ended bid to buy AstraZeneca (NYSE:AZN). As long as taxes in the U.S. remain high, there'll be plenty of incentive to do tax inversions.