June 17, 2014
Some wealthy Americans have moved overseas to avoid the long arm of Uncle Sam. Now, a growing number of companies are looking to do the same.
Medtronic (MDT), a medical device maker in Minneapolis, is the latest company to seek tax relief by incorporating abroad. It said this week it plans to head to Ireland, a country with lower corporate tax rates, through a $42.9 billion takeover of Covidien (COV).
Medtronic, which makes heart devices and materials used in spinal surgeries, isn't actually picking up and moving everything to Ireland. CEO Omar Ishrak will still run the company from Minnesota, Bloomberg reports, and its operational headquarters will remain the same. Medtronic employs more than 8,000 people in Minneapolis, in fact. The company it plans on buying, Covidien, is headquartered in Dublin but mostly run from Massachusetts.
The U.S. corporate tax rate is 35 percent, although many companies take advantage of loopholes and other quirks of the system to reduce their rate. Still, Ireland's corporate tax rate is just 12.5 percent.
Moving a corporate address overseas for the tax benefits is known as a "tax inversion," and it's becoming an increasingly attractive option for companies. About 44 American companies have reincorporated overseas or plan to do so, Bloomberg reports, including 14 since 2012.
Companies can opt for an inversion if foreign shareholders own at least 20 percent of their stock. Often, buying a foreign company for a large chunk of stock is the easiest way to accomplish this.
Pfizer (PFE) tried this year to buy British pharmaceutical company AstraZeneca (AZN), finally giving up its quest in May after getting rebuffed four times. The takeover would have saved Pfizer an estimated $1 billion each year in taxes. Pfizer's U.S. tax rate is around 27.4 percent, compared with 21.3 percent for AstraZeneca, The Wall Street Journal reports. Analysts guessed that every percentage point in tax reduction could get Pfizer $200 million more in annual profit.
Another consideration for companies like Pfizer is that shifting an address overseas could give them access to all the cash they hold offshore. U.S. companies have about $2 trillion sitting in overseas bank accounts, and would have to pay income taxes on that money if they wanted to bring it back home. Congress has deadlocked for years on how to handle the issue.
U.S. lawmakers aren't happy with the increasing number of tax inversions. Last month, 14 senators introduced a bill that would freeze all inversions for two years. The plan is to use that delay to figure out how to improve the corporate tax code, The New York Times reports.
The senators can't exactly stop a company from moving, but they can change that requirement that 20 percent of stock be owned by foreign shareholders before an inversion occurs. They want to raise that threshold to 50 percent for two years, which would effectively clamp down on inversions.
"This is about leveling the playing field and rooting out flagrant tax abuse in our system that could lead to billions of dollars of lost revenue," Democratic Sen. Tim Kaine of Virginia said, according to The Times. "In order to fully restore budget certainty, we need to look at abuses in the tax code as much as spending."