EDITORIAL: Corporate tax code driving companies to renounce U.S. citizenship

July 16, 2014 

Inversion:

• A change in the position, order, or relationship of things so that they are the opposite of what they had been.

-- Merriam-Webster

• Re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation.

-- Investopedia

You’ll be hearing a lot about “inversion” in the coming months. Just this week, according to The New York Times, Mylan Laboratories, a huge generic drug company headquartered in Pittsburgh, announced a $5.3 billion deal to buy Abbott Laboratories’ European generic drug business and give up its U.S. citizenship and move to the Netherlands to escape U.S. taxes.

Also on Monday, Abbvie, another pharmaceutical company based in Chicago, announced it had received tentative approval for a $53 billion deal to buy Irish drug maker Shire. According to Thomson Reuters, the health care sector has experienced $328.8 billion in inversions this year with more to come.

AstraZeneca has been a target of Pfizer and Omega Pharma, a Belgian drug company, is said to be looking for a suitor.

Just as our textile and electronic manufacturing businesses headed overseas in search of cheap labor, our, drug companies are lured by lower taxes. Mylan’s chief, Heather Bresch, who just happens to be the daughter of Sen. Joe Manchin, D-W.Va., said the tax rate for the company is about 25 percent. Once in the Netherlands, that effective rate drops to 21 percent and after three to five years would drop, according to The Times, to the upper teens. The company would still pay taxes on profits made in the U.S. but not on its overseas operations.

Corporations have been claiming for years that the U.S. tax rate is too high, now they are taking their ball and heading elsewhere. No one knows the exact hit the Treasury may take.

The Wall Street Journal said estimates could reach $19.4 billion over a decade. One thing is sure, Washington, D.C., is getting interested and some lawmakers have proposed putting a halt to inversions. However, that has just inspired companies to speed up their inversion process.

This inversion phenomenon may be short-lived because of the limited number of international companies that fit the criteria, but it still points to the competitive disadvantage the U.S. has because of an antiquated tax code. As Forbes put it, “The time for corporate tax reform is now.”

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