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Manufacturers Are Taxing Obama's Patience with Inversion Deals

July 24, 2014
The luck of the Irish may be running out if the Obama Administration succeeds in squashing tax inversion deals that have made low-tax rate countries like Ireland attractive to U.S. corporations.

We’ve been following the great interest that U.S. pharmaceutical manufacturers have in moving their corporate headquarters to another country, an increasingly popular strategy known as tax inversion. Although Pfizer has so far failed in its attempt to merge with a foreign-located company, fellow pharma firm AbbVie, recently just pulled off a merger with Shire, a company based in Ireland where the corporate tax rate is only 12.5%, nearly one-third the rate U.S. companies are taxed at. And as this slideshow illustrates, AbbVie is just one of many U.S. companies that no longer want to be U.S. companies… at least, not when the tax bill comes due.

Predictably, the Obama Administration’s response to this growing trend has been an attempt to retroactively cancel all of the tax advantages that U.S. companies gain from tax inversions, backdating the proposed legislation to May 2014, which would throw into turmoil such recent deals as the AbbVie-Shire merger and the Medtronic-Covidien merger.

Speaking for the Obama Administration, Mark Mazur, assistant secretary for tax policy at the Treasury Department, wrote in his blog, “[B]ackdated implementation is often important to ensure that companies do not take advantage of the lengthy legislative process to rush through transactions exploiting the loopholes they know they are about to lose.”

In its coverage of the ongoing debate, the New York Times suggests that “there is growing consensus on Capitol Hill that the rush of inversions should be stopped,” but then observes that Republicans in the Senate will not support the call for backdating any anti-tax inversion legislation.

What neither Mazur nor the Times mentions, though, is why U.S. companies are so ready to bail out of their homeland’s corporate tax base in the first place. Another report, in the Wall Street Journal, comes closer to the main point when it observes that “the U.S. expects to rake in $333.7 billion in corporate income tax this year, more than 20% above the $273.5 billion it collected last year. That figure could rise as high as $528 billion by the end of 2017, according to White House projections.” So clearly, the White House wants to keep as much of that growing pie of tax dollars as it can get its hands on.

Rather than addressing the high corporate tax rate (the U.S. rate, in fact, is the highest of all the OECD countries) and examining why exactly U.S. manufacturers are finding they can best compete on a global basis if they relocate to another country, the federal government will instead seek a policy of, “You can’t do this anymore because we say so.”

As the Times also notes, financial advisors don’t believe any anti-tax inversion laws will be passed this year, especially since tax reform has been near the very bottom of Congress’s list of initiatives for many years, and it’s likely that we’ll see more companies try to finalize relocation mergers as soon as possible.

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