What Corporate Inversions Are Telling Us (And What Washington Refuses To Hear)

What do AbbVie and Shire; Walgreens and Alliance Boots GmbH; Pfizer and AstraZeneca; Medtronics and Covidien Plc; Perrigo and Elan;, Actavis and Warner-Chilcott have in common? They are companies undertaking corporate inversion transactions whereby the U.S. company seeks to save taxes by removing its worldwide operations from the U.S. tax system.

An inversion is the name of a transaction where the U.S. corporation (USCO) acquires a foreign corporation (FC); however, USCO is not the parent in the new structure. Instead, USCO places itself beneath FC in the corporate structure. Once the transaction is complete, USCO’s foreign operations are transferred from USCO to other companies within the group. The benefit of such an undertaking is that U.S. taxation of USCO’s worldwide operations is eliminated and the U.S. is left with taxing jurisdiction over only those activities taking place only in the U.S.

An internet search for stories reveals that the tax savings are substantial, often reciting a reduction in the overall effective tax rate of ten or twenty percent. This is achieved in several ways. First, techniques, such as patent boxes, are used to license intellectual property (IP) from low-tax jurisdictions in exchange for royalty payments to a licensor resident in low or no-tax jurisdictions. Second, the host country may not have controlled foreign corporation rules that accelerate taxation of income to the parent even before the income is repatriated. Third, the foreign tax credit calculations may become less troublesome without facing complex U.S. rules. Fourth, U.S. transfer pricing would apply to licenses into the U.S., not all jurisdictions as before the inversion.

There are legitimate business reasons for the companies combining, such as expanding product lines or achieving economies of scale. There are expanding markets around the world fueled by a burgeoning middle class that will be consumers of technology, retail products, healthcare and entertainment. China is but one example of a market growing to serve the needs of an expanding middle class. There is no reason for that market must be served by a U.S. corporation.

As a tax, trust and estate attorney, Frank Brunetti and I often write about this hot- button issue. Check out our previous posts on the subject here:

• Treasury Secretary urges Congress to end inversions

• New Congressional Report Highlights Tax Inversions

• Medtronic the Latest Company to Propose Tax Inversion

• Senators Consider Closing Tax Inversion Loophole

• Walgreens Urged to Undergo Tax “Inversion”

• U.S. Corporate Tax Outlook Fueling Inversion Deals

• International Tax Trends

• Report Shows How Much Walgreens Stands To Gain with Inversion

• Levin: Bill Limiting Corporate Inversions Later This Week