The hottest trend in corporate America could prove to be extremely costly for the United States.
Chicago-based pharmaceutical company AbbVie, with its pending $53 billion takeover of Irish drugmaker Shire, is just the latest American company to acquire a smaller overseas competitor at least in part to capture the tax benefits of reincorporating abroad.
The AbbVie deal would be the largest merger announced so far this year, but also just one in a long and growing line of so-called tax inversions, particularly in the pharmaceutical sector, in which U.S. companies have sought to escape the 35 percent American corporate tax rate. AbbVie has said a deal would allow it to drop its effective tax rate to about 13 percent by 2016, from about 22 percent now.
Although the federal corporate tax rate is touted as the world’s highest at 35 percent, data from the Government Accountability Office show that corporations paid an average effective tax rate of roughly 17 percent last year. That doesn’t include state or local taxes, which few overseas corporations pay. And that’s done little to keep companies from looking for more attractive tax rates overseas.
“Corporations don’t want to pay the taxes and (inversion) is a way they are getting out of it,” Kenneth Thomas, a professor at the University of Missouri-St. Louis’ Center for International Studies, said. “It’s a loss of revenue to the government that’s going to have to be made up through cutting programs, taxing other people or taking on more debt. It’s got to be one of the three.”
An AbbVie takeover of Shire would represent the 48th domestic company to reincorporate overseas through inversion in the last decade and the 77th overall since 1983, according to data from House Ways and Means Committee Democrats. Mylan, a Pennsylvania-based maker of generic drugs, also announced Monday that it has agreed to buy the generics business of Abbott Laboratories for $5.3 billion, with the combined companies to be organized in the Netherlands. And Walgreen Co. is considering reincorporating abroad as well.
Whether these inversions are a sign of oppressive tax rates or a loophole that needs closing, they’re happening — and the trend will deprive the U.S. of billions of dollars if it’s allowed to continue. Calculating just how much the U.S. government stands to lose is made difficult by the murky nature of corporate tax reporting and other factors. But researchers for Congress’s nonpartisan Joint Committee on Taxation earlier this year estimated that a bill to curtail tax inversions and could raise roughly $20 billion over the next decade. That estimate does not include the latest announced or potential inversion deals.
The continuing flow of such deals highlights the urgency of congressional action, said Edward Kleinbard, a law professor and tax policy expert at the University of Southern California who served as the chief of staff for the Joint Committee on Taxation from 2007 to 2009. “The inversions demonstrate the need for fundamental corporate tax reform,” Kleinbard said. “In that sense, they are a canary in the coal mine. On the other hand, (if Congress waits) to get around to corporate tax reform, there won’t be a corporate tax base left to reform.”
For now, the ongoing merger wave in the health care sector only adds pressure on companies to explore moving overseas. “At this point, corporate directors are going to feel that they are chumps for doing nothing,” Kleinbard said. “That’s a dangerous place from a policymaker’s point of view and for corporate America. (Tax) revenues will start hemorrhaging faster and faster. Once structures are inverted, it’s extremely difficult to recapture them.”
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