I am Not Sure How I Feel About the Recent Tax Inversion Activity

If you follow business news at all you’d see an increase in tax inversion stories.  To put it simply tax inversion is when a United States company buys a foreign company and adopts the purchased company’s address to reduce taxes owed to Washington.  A screenshot from google’s search insights shows the increase interest in the topic:

tax inversionWhat is Tax Inversion?

Unsurprisingly, Forbes provides a more thorough definition tax inversion,

The basic idea of a tax inversion is really rather simple. If the US corporate taxation system is becoming a burden on a company then obviously, the thing to do is to move the domicile of the company so that it’s no longer subject, for its outside the US operations at least, to that US corporate taxation system. Unfortunately this is becoming harder. If you try to just move the company out of the US then the IRS is going to frown very hard at that. To the point that you have to (almost, but not quite) dissolve the company, pay any tax that might be due in the future and then reconstitute the company again. Given that any company of any age is going to have substantial unrealised gains hidden in it this is really a very unattractive option.

The better way to do it is an “inversion”. Go and buy some foreign company but structure the deal so that it’s either the foreign company taking over the American, or some new holding company somewhere which then owns both of the two “merging” companies. If more than 20% of the entire operation ends up being owned by those foreigners then this can mean that the original US company moves out from being US domiciled and thus frees itself from the US corporate tax code. And this without triggering massive demands from the IRS as everyone waves bye bye.

Statistics Regarding Tax Inversion by United States Companies

The recent increase in media attention regarding inversion has to do with a few huge deals:

  • American based Pfizer buying UK Based, AtstraZenica (which, at the time of publishing seems to be dead)
  • Medtronics buying Irish Covidein
  • Walgreens buying the rest (they already own 45%) of a Swiss company named Alliance Boots

According to Bloomberg,

About 41 U.S. companies have reincorporated in low-tax countries since 1982, including 11 since 2012.

That first blimp for the keyword, Tax Inversion, in the google trends graph above happened in 2012.

Why A Company Would Partake in a Tax Inversion Takeover?

Money…or put more eloquently from the same Bloomberg article,

It’s easy to see why multinational companies like to flee the U.S. tax system. The U.S. corporate income tax rate, 35 percent, is the highest in the developed world. The U.S. is also one of the few countries that makes its companies pay that rate on all the worldwide income it brings home — even if the profit was generated by a subsidiary in a foreign country with low taxes, such as Ireland. Many nations, including the U.K. and Canada, tax only domestic profits. One perverse result is that an independent U.S. company can end up paying more taxes than an identical U.S. company owned by a foreign parent. By creating or buying a foreign parent, a company escapes U.S. tax on worldwide income. Drug and technology companies find this particularly enticing because their profits stem from intellectual property such as patents. Transfer those patents to a subsidiary in a zero-tax jurisdiction like Bermuda, and voila! The bulk of profits, which would otherwise face the 35 percent income tax rate, aren’t taxed anywhere.

Why I am Pro-Companies Taking Advantage of the Tax Inversion Loophole

Whether your name is Evan or Warren Buffet no one has a patriotic duty to pay more taxes than what they are legally bound to by the laws of the United States.  I believe that this sentiment extends to corporations (even ones I don’t like such as Apple).These companies are following the rules as they have been given to them.  Want them to behave a different way? Change the rules!

Maybe that means change the tax rate? Maybe that means change how we treat worldwide income? Maybe that means change our patent protection system? Maybe that means you don’t get use of our publicly traded markets? Maybe companies that do this have to repatriate all income worldwide prior to the merger?

Notwithstanding, even as I write this post I am not sure if I really believe the libertarian-global economy argument.  I am an American, and something just bothers me about a company ditching the home that provided the stable environment to grow in just to save on taxes.  Hell, it is the taxes they are trying to avoid that keeps our infrastructure up to transport widgets throughout the world, our patent system that while not perfect protects the ideas that make the widgets and our police going to protect from the widgets getting stolen.

 

Do you have an opinion on Tax Inversion?

6 Responses to I am Not Sure How I Feel About the Recent Tax Inversion Activity

  1. I totally agree with you. I doubt most people will mainly because they did not think about it as deeply as you would. People read a headline at a store shelf or bus stop and its “Bad companies hurt us all”. They don’t read the article or research it => then make a educated comment like you have above.

    It’s the same for all this BS about a $15.00 / hr minimum wage. The Fed prints money for years inflating all the prices of everything people purchase. The buying power of a dollar disappears, packages of food and goods shrink and the prices rise. Surprise! People have trouble making ends meet, and all of a sudden businesses are the bad guys because they don’t pay enough? Somehow its their fault and up to them to try to bring minimum wage earners standard of living back to what it was 5 years ago.

    Is the general population really that ignorant of what really goes on?

    • Is the general population really that ignorant of what really goes on?

      Yes and it is so F’n frustrating!

      The minimum wage discussion is a very interesting one – in fact its similar to the one here. On the one hand there is something inherently upsetting about someone getting paid $10 or whatever the minimum wage is today…but it shouldn’t be a stretch for someone with reasonable intelligence to jump to the other side, if a company has $50K in payroll they are going to have to fire someone when their costs jump 40%!

  2. They definitely have to do something. I think requiring companies to pay a higher tax for jobs produced outside the USA would help. Eliminate the idea of bringing in workers unless they train a local person.

    Or, just raise the minimum wage here, so flipping burgers can become a highly paid career. That’s the way it’s headed. We can import any top talent we need, and outsource any manufacturing.

    • “I think requiring companies to pay a higher tax for jobs produced outside the USA would help.”
      - How would they even do that? If Apple builds a new plant in China they would get taxed? Doubt that would help…in fact they would be running to tax inversion

  3. Here’s an interesting antidote about the Medtronic inversion. I know an elderly person, 83+ years old. Her cost basis for Medtronic is 0.35 per share, and she lives on their dividend.

    Once the inversion happens, they treat the shares as being sold, and then new shares re-purchased. She will have a $90K+ tax bill. Instead of an increased basis due to an estate.

    Congress should at lease stop that bad practice.

    And the Corp execs, get their tax liability paid by the Company.

    • “Congress should at lease stop that bad practice.”

      - Fix the cause of the problem not just put a band aid on one unintended consequence

Leave a reply


− 1 = 7