America Is Worried about the Tax Relocation of Its Multinational Companies

By means of cross-border takeover bids, more and more groups are looking to put their headquarters outside of the United States.

The British laboratory Shire has finally given in: On Friday July 18, it accepted an offer of around $55 billion from the American company AbbVie — an enormous takeover bid that throws more oil on the fire in the debate about the phenomenon of “tax inversion” that has been stirring things up in Washington for several weeks. Authorities’ concern is indeed rising as mergers and acquisition deals, which involve a form of tax relocation of American companies, multiply.

Last Tuesday, Jack Lew, Barack Obama’s treasury secretary, sent a letter to the chairmen of Congress’s finance committees to ask them to put an end to this “abuse of our tax system immediately.” He is proposing to Congress, in the name of “economic patriotism,” an emergency measure to retroactively block the tax benefits associated with the purchase of foreign companies by American businesses.

In the tax code’s current state, as soon as the proportion of foreign stockholders in a company which has tax headquarters in the United States climbs above 20 percent, it is free to change its tax home.

This is an opportunity that a number of big names in the American economy have decided to seize, with a preference for relocating their tax forms to London or Dublin. The banana giant, Chiquita Brands, has set its sights on the Irish company Fyffes. Medtronic, which sells medical devices, wants to buy the Irish company Covidien for $43 billion. The Mylan laboratory will appear in the Netherlands by buying a part of Abbott for $5.3 billion. Walgreens, the enormous chain of drugstores, is planning an identical deal with the Swiss company Alliance Boots.

In the gaming realm, the American company IGT has itself agreed to be bought by the Italian company G-Tech; there are no “tax inversions” in its case, but a tax relocation of a new plant, the headquarters of which is due to be set up in the United Kingdom.

The Phenomenon Speeds Up

Last month, in particular, it was the pharmaceutical giant Pfizer that wanted to take the plunge by swallowing AstraZeneca. The British company resisted the offer of around $117 billion. But this failed deal, during which Pfizer raised its offer several times, just as AbbVie did — successfully — for Shire, proves how much the prospect of profits offered by “tax inversion” permits American companies to pay a high price for their European targets.

A congressional committee estimates that Uncle Sam would lose $20 billion in tax money if the tax relocation of companies continues. The United States is the only county in the G-7 to tax companies, and private individuals moreover, on the whole of their income in the world, as soon as they are back on American soil.

A tidy rule with perverse results: American giants like Boeing, Microsoft, Apple, Google, GE or IBM have accumulated about $2 trillion from overseas nest eggs, which avoids the 35 percent American tax on earnings.

In undertaking a “tax inversion” deal, companies are looking to be able to use profits made abroad in the most favorable tax framework, like that of Ireland, which has 12.5 percent tax rate on earnings. “We wouldn’t be doing it [buying Shire] if it was just for the tax impact,” head of AbbVie Richard Gonzalez maintained Friday. “Companies like ours need access to global cash flow … Today we’re at a disadvantage compared to our foreign competitors and that’s the debate we should be having around inversions and our tax code,” he added.

For Washington, the phenomenon is all the more worrisome since it seems to be speeding up. It’s as if companies, carried away by the mergers and acquisitions frenzy boosted by abundant financing, wanted to take advantage of the opportunity before the law changes. Shire negotiated compensation of 3 percent of the deal with AbbVie in the case of its failure, especially in the case of changing tax rules.

It is, however, unlikely that a law limiting or prohibiting “tax inversion” will be voted on in the short term, that is to say before the November elections. The Republicans who dominate the House of Representatives don’t want to deal with the problem except by means of sweeping tax reform. Yet the chance of those proposals being written before next year is practically nonexistent.

In the Senate, the Democrats, of course, have a majority for the moment, but they are divided. And President Obama’s lack of personal involvement on this issue isn’t helping anything.