What it is:
Corporate inversion is practice by U.S.-based companies of exchanging their registration with a subsidiary outside the U.S. in order to pay lower taxes.
How it works/Example:
Many large companies in the U.S. have smaller subsidiary companies located outside of the country. Called "offshore subsidiaries," these smaller companies are registered and taxable in the country in which they are located. Since the tax burden for some wholly-owned foreign companies can be significantly lower under these circumstances, the U.S.-based parent company may engage in corporate inversion, swapping registrations with its offshore subsidiary so it is taxed at a lower rate.
For example, if U.S.-based Company XYZ owns Subsidiary ABC, located in the Caribbean, and ABC is taxed at a lower rate, XYZ may use corporate inversion to switch its U.S. registration with the Caribbean subsidiary in order to lower its overall tax burden.
Why it matters:
Corporate inversion, while a legitimate tax strategy, has serious implications for the revenue collected by the Internal Revenue Service (IRS). With the growing popularity of corporate inversion in recent years, the IRS has made an effort to impose penalties and other deterrents upon companies that engage in this practice.