President Obama Hopes To Tighten Reigns On Corporate Tax Inversions

In a news conference last Wednesday, President Obama said Congress needs to help stop U.S. corporations from transferring their headquarters to acquired overseas companies, just to lower their taxes. It’ll be a tough argument, though, since the U.S. tax inversion rate is 35 percent, the highest in the industrialized world, according to a report in the Pittsburgh Post-Gazette — and the pharmaceutical industry in one of the biggest contributors feeding this rapidly growing trend.

For instance, in the past few months, news coming out of the pharma world has been swirling around overseas acquisitions:

• In July, Chicago-based drug maker AbbVie acquired Ireland-based Shire for $55 billion. Through transferring its offices overseas, AbbVie estimates they will save hundreds of millions of dollars.
• Also in July, Mylan announced its acquisition of part of Abbott Laboratories, with plans to reincorporate in the Netherlands,
• In June, Minneapolis-based Medtronic bought out Irish medical device manufacturer Covidien for $43 billion.

Why are inversions growing?

A recovering economy makes business culture ripe for mergers, which then provides companies with the capital and resources to expand. These same companies are lured overseas by a combination of factors, including fewer regulations, Europe’s unified monetary system, and the ability for real-time currency exchanges. In fact, it’s estimated that the U.S. is losing out on $2 trillion that is being kept overseas because companies simply aren’t willing to pay the steep taxes it takes to bring business back to the U.S.

Senate Finance Committee Chairman Ron Wyden, D-Ore., has been vocal on his stance on what he called the “inversion virus.”  He insists that the U.S. needs to “curtail inversions before they erode the tax base” and hopes Congress can work together on a solution before it plagues the country any longer.

Are taxes the only reason?

Congress is deeply divided on the tax inversion issue, and a number of analysts say “action is unlikely” and a crackdown “won’t deter companies” from following through with tax inversion plans, anyway.

Why? Because tax breaks aren’t the only factors involved in corporate decisions to take the hop across the pond.

Mylan, for example gains much of its profit from intellectual property (IP), such as patents, which can easily be transferred overseas.

“The development of intellectual property abroad is helpful to pharmaceutical companies, so they go to the Netherlands and other countries that have more liberal regulatory policies,” Fran Muracca, tax attorney and partner in the firm of Jones Day, told the Pittsburgh Post-Gazette.

In May, House Democrats introduced anti-tax inversion legislation, which nearly reflected President Obama's fiscal-year 2015 budget. But Republicans feel the only way to keep U.S. companies from uprooting is to overhaul the U.S. tax code, including a reduction of the 35 percent top tax rate on businesses. Once Congress reconvenes this month, the issue will be revisited. As part of his statement last week, President Obama said he has his staff are researching any other possible alternatives to curb this inversion trend.