Bachelor of General Studies (BGS) Degree Practice Exam

Which statement best describes the practice of tax inversion?

1. Shifting headquarters to a domestic location

2. Avoiding taxes by keeping all operations local

3. Increasing domestic debt only

4. Shifting headquarters abroad and increasing debt

The correct answer is: Shifting headquarters abroad and increasing debt

The practice of tax inversion specifically refers to a corporate strategy where a company relocates its legal domicile to another country, often for the purpose of reducing its tax burden. By shifting headquarters abroad, typically to a jurisdiction with lower corporate tax rates, companies can effectively lower their overall tax liabilities. This strategy may also involve taking on additional debt to finance the move, which can further optimize tax advantages—both from possible interest deductions and the financial structuring of the merger or acquisition that many inversions involve. In contrast, the other options do not align with the specific strategy of tax inversion. Relocating to a domestic location or keeping operations local does not fulfill the core objective of tax inversion, which is to take advantage of international tax differences. Similarly, increasing only domestic debt does not address the relocation aspect central to tax inversion. Thus, the comprehensive description captured in the correct statement encompasses both the relocation and financial strategy, making it the most accurate representation of the practice.