Tax planning has become synonymous with nefarious activity but the reality is that tax planning is essential to the viability of any business.

Consider Mylan, a worldwide pharmaceutical company whose publicly traded holding company moved to the Netherlands in 2015. In that transaction, the shares of the U.S. parent corporation were exchanged for the shares of Mylan N.V., a Dutch company in a taxable inversion. As part of a larger simultaneous transaction, Mylan N.V. acquired certain assets of Abbot Labs thereby removing Abbot’s non-U.S operations from Controlled Foreign Corporation status. If one believes the rest of the world is a growing market, the extraction of these Abbot assets from potential future U.S. taxation will enable Mylan to better compete globally.

As you may know, the United States taxes on a worldwide basis and not a territorial one. Earnings from an active trade or business of a foreign subsidiary of a U.S. corporate parent are not taxed until repatriated. Typically, the problem with repatriation is that there is additional U.S. tax to be paid, especially where those foreign earnings were taxed at a rate lower than the U.S. rate. This explains why trillions of dollars held by U.S. companies remain offshore. If the foreign business is not active and produces Subpart F income, the income is taxed by the U.S. even if not repatriated. When a business is competing globally, these tax rules inhibit structures that are efficient from a business perspective and present obstacles rather than opportunities. Businessmen look at the competition, which may be based in jurisdictions that offer more favorable tax rules, and decide that their companies must have the same advantages or must shed the disadvantages of a worldwide tax system.

Mylan, as do many other businesses, is under tremendous pressure regarding pricing. Mylan has generic products which suffer, no doubt, from this pressure and a formidable regulatory environment. Transfer pricing is a science or an art form that employs many economists to arrive at a fair price charged between related parties for tax purposes. The inversion offers an opportunity to avoid CFCs, Subpart F, Transfer Pricing (economists) and the Foreign Tax Credit. The fact that companies invert should be no surprise.

Despite all of this, the United States remains a desirable market especially for pharmaceutical products where consumer demand is strong and there is wealth available to make drug purchases. So what does a Mylan do to improve its U.S. results? Waiting for tax reform and lower corporate rates is not a strategy. Mylan reverted to some basic tax planning by utilizing tax credit incentives to improve its profitability. There is no requirement that these tax credits be generated by one’s core business. Often, it is only by providing tax credit incentives that capital can be attracted to certain types of investments. Clearly, coal is not viewed as a business having a great future.

Mylan invested in five companies eligible to qualify for the Refined Coal Tax Credit. Financial Statements report that $100 million of credits were used in both 2015 and 2016 along with $95 million in 2014. The effective tax rate for Mylan was 4% and 7.4% in 2014 and 2015, respectively. Interest expense and operating losses further helped Mylan to reduce its effective tax rate. Financial analysts reported that the cost of Mylan’s coal tax-adjusted investment was only sixty percent of the tax credits. Although the coal tax credit expires in 2021, Mylan must be given respect for its efforts to reduce its effective tax rate. Also, Mylan no longer has the pesky problem of repatriation of foreign earnings and has adjusted its structure to adapt to the worldwide business climate.

Do you have any questions? Would you like to discuss the matter further? If so, please contact me, James McDonough, at 201-806-3364.