It seems as if every day another U.S. company is announcing plans to merge with a foreign company in order to save millions of dollars in taxes. That's not really the case, of course, but a growing number of companies are doing it, even if they don’t always admit the reason.
Just this week Salix Pharmaceuticals (SLXP) of North Carolina announced it was acquiring the Irish arm of Italian drug company Cosmo Technologies and U.S. drugmaker AbbVie (ABBV) raised its bid to buy Shire (SHPG), another Irish drugmaker, which had previously rejected its offer.
These follow previous announcements of mergers between medical device maker Medtronic and Covidien, also based in Ireland, and between fruit company Chiquita Brands (CQB) and Irish food distributor Fyffes (FFY.L). Walgreen (WAG) is considering a similar move.
David Cay Johnston, a Pulitzer prize-winning reporter, now lecturer at Syracuse University's law school and business school, tells Yahoo Finance that these moves are nothing new. “A lot of that money overseas is being siphoned out of the U.S. through accounting devices ... because of a 1986 law … that lets companies build up profits tax-free.... A lot of big companies like Apple (AAPL) literally turn a profit off their taxes."
Bloomberg reported in March that U.S. companies added $206 billion to their overseas stockpiles last year and Microsoft (MSFT), along with Apple (AAPL) and IBM (IBM) accounted for 18% of that total. And the Congressional Research Service says 47 U.S. companies have "inverted" since 2003--almost double the number in the previous 20 years.
But Mattie Duppler, director of budget and regulatory policy at Americans for Tax Reform, Grover Norquist's organization, says companies are just “trying to decrease their [tax] liabilities and be able to keep revenues at a place where they can continue to hire workers and continue to invest in [their] products…. but they can’t do that if they're living in an environment that makes them globally uncompetitive and that's what the United States is right now." Duppler, who debates Johnston in the video above, cites the U.S. corporate tax rate, which is the highest in the developed world, at 35%.
But how many companies pay that? Citizens for Tax Justice reported that from 2008 through 2012 twenty-six Fortune 500 companies including General Electric (GE) , Verizon (VZ) and Boeing (BA) paid no federal income taxes for that period.
Johnston says, "The corporate income tax is 2% of the total economy... an insignificant amount of money compared to other factors affecting corporations." For example, subsidies to drug companies through the U.S. patent system and the government's refusal to negotiate discounts in the Medicare prescription drug program are “many, many times their corporate income tax bills,“ says Johnston.
“This is really a problem of corporate managers who are risk averse wanting to avoid reinvesting their money in the U.S," says Johnston. He also faults Congress for "having passed laws" that help managers do just that.
Duppler agrees with Johnston that Washington has damaged the incentive system for companies to operate rationally. But she says the corporate tax rate is too high and the tax system unfair, penalizing companies that want to repatriate overseas earnings. She suggests a round of repatriation of overseas profits at a rate that's not punitive, but says "corporate tax reform is certainly the long-term goal.”
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