Tax Inversion: One Way to Lower One’s Corporate Tax without Waiting for Washington
A growing number of US companies are set to save hundreds of millions of dollars in tax by relocating to Europe after completing takeovers of Europeon firm, according to a report in the Financial Times. ”Some of the biggest mergers and acquisitions so far in 2013 have involved so-called “tax inversions” – where a US acquirer shifts overseas, to Europe in particular, to pay a lower rate. These deals have come at a time when politicians in Washington have been increasing their calls for corporate tax reform.”
August 23 2013 by ChiefExecutive.net
The FT report went further in detailing companies making use of tax inversion: “Michigan-based pharmaceuticals group Perrigo said its acquisition of Irish biotech company Elan will lead to re-domiciling in Ireland, where it has given guidance it expects to pay about 17 per cent in tax, rather than an estimated 30 per cent rate it was paying in the US. Deutsche Bank estimates Perrigo will achieve tax savings of $118m a year as a result.
Another pharmaceuticals takeover – New Jersey-based Actavis’s acquisition of Warner Chilcott in May – will also result in a move to Ireland, where Actavis’s tax rate will fall to about 17 per cent from an effective rate of 28 per cent tax, and enable it to save an estimated $150m over the next two years.
Similarly, US advertising company Omnicom has said its $35bn merger with Publicis will result in the combined group’s headquarters being located in the Netherlands, saving about $80m in US tax a year. Meanwhile, Liberty Global’s $23bn acquisition of Virgin Media will allow the US cable group to relocate to the UK, and pay its lower 21 per cent tax rate of corporation tax. Many US acquirers of European companies have not disclosed their exact tax savings.”
The IRS is keen to thwart inversions
but this hasn’t slowed interest. Increased use of tax inversion has coincided with with Democrats, Republicans and the White House agreeing that the current code, which imposes a top rate of 35 per cent but offers a plethora of tax breaks, is in need of reform.
Given the unlikelihood of Congress or the President fixing the tax code any time soon interest in tax inversion transactions will undoubtedly increase.