New Legislation Targets Inversion Deals

New Legislation Targets Inversion Deals

Inversion deals, a controversial tax arrangement in which a business incorporates in another country to avoid paying U.S. corporate taxes, have come under fire in a new way recently.

A bi-partisan bill, “No Federal Contracts for Corporate Deserters Act,” proposes to ban companies that take advantage of inversion deals from receiving contracts from the federal government. The four senators sponsoring this bill believe that this type of action is both warranted and necessary. The bill aims to discourage inversion by causing companies who incorporate elsewhere to lose out on money making opportunities.

Why this is an issue

U.S. companies pay steep corporate taxes that average approximately 35 percent. When a company engages in an inversion deal it no longer has to pay those taxes. Instead, it is taxed in the country where the merged company’s headquarters are located. This often allows businesses to pay lower tax rates, which costs the U.S. government a lot of money each year.

The Joint Committee on Taxation estimates that the United States will lose approximately $19.46 billion in tax revenue over the next 10 years if inversion continues at the current rate.

Opponents of the bill argue that it would be much more cost-effective for the U.S. government to lower the corporate tax rate, while supporters want to discourage inversion so that companies are required to stay on U.S. soil and pay U.S. taxes.

The tax difference

More companies are taking advantage of inversion than ever before. Of the 55 inversion deals that have taken place since 1994, 20 have occurred during the past 18 months.

Inversion deals occur because companies either can’t afford U.S. taxes or don’t want to pay high tax rates. The United States taxes corporations at a rate of between 35 percent and 39 percent. Economists predict that unless the corporate tax rate falls below 10 percent, it will still be in a company’s best financial interest to invert.

The United Kingdom is one of several countries with lower corporate tax rates that has become a popular target for inversion:


Most attractive destinations

United Kingdom 21% Finland 20%
Ireland 12.5% Hungary 19%
Chile 20% Iceland 20%
Czech Republic 19% Slovenia 17%
Poland 19% Turkey 20%

 

The average tax rate in these countries is 18.75 percent, nearly half the corporate tax rate in the U.S.

Industries leading the way

Pharmaceuticals, healthcare and retail companies have led the way with inversion deals. In the last couple of years, a number of inversions have been attempted or accomplished:

1. AbbVie’s (U.S.) acquisition of Shire (UK) for $54B (2014) – The biggest inversion deal in history, if completed.

2. Medtronic’s (U.S.) acquisition of Covidien Plc (Ireland) for $42.9B (2014)

3. Pfizer (U.S.) attempted to acquire AstraZeneca (UK) for $106B (2014). The deal was ultimately abandoned for unrelated reasons.

4. Mylan (U.S.) attempted to acquire Meda AB (Sweden) (2014)

5. Walgreen’s (U.S.) acquisition of Alliance Boots (UK) for $6.7B (2012) – could see Walgreen shift its headquarters to Switzerland

6. Mallinckrodt’s (U.S.) acquisition of Questcor (Ireland) for $5.6B (2014)

7. Fyffes’ (Ireland) acquisition of Chiquita (U.S.) for $1.07B (2014)

Inversion deals offer large companies big tax benefits. By working out an acquisition deal where the U.S. company owns no more than 20 percent of the total assets after merging with a foreign company, these large businesses can cut their tax rates in half.

It remains to be seen what impact the “No Federal Contracts for Corporate Deserters Act” will have. For some companies, missing out on future government contracts might just be worth it.