A multinational corporate group headed by a U.S. parent corporation is often at a competitive disadvantage compared to a multinational corporate group headed by a foreign corporation. While a multinational corporate group headed by a U.S. corporation is generally subject to U.S. taxation on its worldwide income, subject to the potential availability of the foreign tax credit and U.S. tax deferral, a multinational corporate group headed by a foreign corporation is generally subject to U.S. taxation only with respect to (i) taxable income derived by U.S. affiliates, (ii) U.S. “effectively connected income” of foreign affiliates, and (iii) U.S.-source FDAP (“fixed and determinable, annual or periodical”) income of foreign affiliates.

To maximize its after-tax net economic return, many U.S. multinationals have engaged in so-called “corporate inversion” transactions. In a typical inversion, a U.S. multinational combines with a foreign corporation and the ultimate parent of the surviving entity is a foreign corporation.