Chapter 21 Mini Case

Stanley Works & Corporate Inversion
A case study in estimating the costs and benefits of a U.S.-based multinational company undertaking a corporate inversion
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Opposition and Controversy
– The announcement was met with heated opposition from employees, stockholders and local, state, and federal authorities – Stanley now – in August 2002 – found itself a lightning rod for public debate on the responsibilities of a corporate citizen and the ethics of tax reduction and patriotism – Many regulators were now accusing the company of treaty shopping – The senior management team now wished to reevaluate their inversion decision.
– The United States taxed U.S.-based multinational companies on their worldwide income. As a U.S.-based company, Stanley paid corporate income taxes on all income generated in the United States (domestic source income) and income earned abroad and repatriated or deemed repatriated to the parent company in the United States (foreign source income). – It was this latter tax on foreign source income which was at the heart of the dilemma for companies like Stanley.
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There were two specific expected tax benefits
– First, Bermuda, typical of most offshore financial centers, does not tax foreign source income. Stanley’s profits generated throughout the world could be freely redistributed throughout the global business, including the parent, without creating additional tax liabilities in the country of the parent company (now Bermuda instead of the U.S.). – Second, the U.S. operations of Stanley would now be conducted as the U.S. subsidiary of a foreign corporation. This would pose restructuring possibilities whereby the U.S. subsidiary would have increasing obligations to the Bermuda parent such as royalties, debt service, licensing fees, etc., which were legitimate deductible expenses in the U.S. but income to the parent company itself in Bermuda. The result would be a net reduction in U.S. tax liabilities from Stanley’s business conducted in the United States. – This is termed earnings strin February 8, 2002, Stanley Works (USA) announced that it would enter into a corporate inversion, whereby the company would reincorporate itself as a Bermuda-based corporation – This was an outbound inversion, as the reincorporation was to move the company’s incorporation out of the United States to a foreign country – Currently a U.S.-based corporation with head offices in New Britain, Connecticut, Stanley would make all U.S. operations a wholly owned subsidiary of a new parent company based in Bermuda – The reasoning was simple: Stanley expected to save close to $30 million annually in corporate income taxes by changing its citizenship – On the date of the announcement the market value of Stanley increased by $199 million.
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Stanley Works & Corporate Inversion
• This strategic initiative will strengthen our company over the long-term. An important portion of our revenues and earnings are derived from outside the United States, where nearly 50% of our people reside. Moreover, an increasing proportion of our materials are being purchased from global sources. This change will create greater operational flexibility, better position us to manage international cash flows and help us to deal with our complex international tax structure. As a result, our competitiveness, one of the three legs of our vision to become a Great Brand, will be enhanced. The business, regulatory and tax environments in Bermuda are expected to create considerable value for share owners. In additional to operational flexibility, improved worldwide cash management and competitive advantages, the new corporate structure will enhance our ability to access international capital markets, which is favorable for organic growth, future strategic alliances and acquisitions. Finally, enhanced flexibility to manage worldwide tax liabilities should reduce our global effective tax rate from its current 32% to within the range of 23% - 25%.
• Stanley Works, Form 14A, Securities and Exchange Commission, 8 February 2002.
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Over and over again courts have said that there is nothing sinister in so arranging one's affairs as to keep taxes as low as possible. Everybody does so, rich and poor, and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced extractions, not voluntary contributions. To demand more in the name of morals is mere cant."