Corporate inversion: an expensive way to save on taxes

Adderall

Abbvie has at last acquired Shire, an Irish pharmaceutical company that produces Adderall.

American drug companies AbbVie and Mylan won’t be American long if all goes as planned. Both are involved in international mergers (worth $53.6 billion and $5.3 billion, respectively) with the ultimate goal of moving their home bases abroad.

It’s a move called an inversion, when companies move headquarters outside of the U.S. to avoid American taxes. And many large American companies are doing it or at least considering it.

“What’s going on now is a feeding frenzy,” says University of California, Berkeley law professor Steven Davidoff Solomon. “Every investment banker now has a slide deck that they’re taking to any possible company and saying, ‘you have to do a corporate inversion now, because if you don’t, your competitors will.’”

The math is simple, but international mergers rarely are. Dealing with legal requirements of a new country can be complex and there are invariably cultural issues to handle. There’s also the potential image hit.

“To shift their profits overseas, to some seems unpatriotic,” says Steve Rosenthal of the Urban-Brookings Tax Policy Center. “That’s a real public relations concern.”

Members of Congress are stomping their feet about the current wave of corporate runaways, but partisan gridlock means they’re unlikely to change anything soon. There’s an ongoing debate about how to tax corporations here fairly, but more and more companies are basically exiting that argument, and the country itself.

Mark Garrison: AbbVie is offering $53 billion for Shire. It links up with another company, and in the process saves a bundle on taxes. Arizona State accounting professor Don Goldman says moves like this are especially tempting when competitors do the same.

Don Goldman: It’s kind of a no brainer that if you have a transaction that would allow you to do this, you need to be doing it or you’re gonna get left behind.

Big banks are helping convince companies to move abroad, says Berkeley law professor Steven Davidoff Solomon.

Steven Davidoff Solomon: What’s going on now is a feeding frenzy. Every investment banker now has a slide deck that they’re taking to any possible company and saying you have to do a corporate inversion now, because if you don’t, your competitors will.

The math is simple, but international mergers rarely are. Dealing with legal requirements of a new country can be complex and there are invariably cultural issues to handle. And Steve Rosenthal of the Tax Policy Center points out: companies that do inversions can take a real image hit.

Steve Rosenthal: To shift their profits overseas, to some seems unpatriotic and I think that’s a real public relations concern.

Members of Congress are stomping their feet about the current wave of corporate runaways, but partisan gridlock means they’re unlikely to change anything soon. Mihir Desai is a Harvard Law and Business professor who says it’s no longer a given that companies will be meaningfully part of America, or any country.

Mihir Desai: You can have a financial home in New York, you can have a legal home in a tax haven and your management can sit in London. So that notion that firms are of a country, I think is going away.

There’s an ongoing debate about how to tax corporations here fairly. But more and more companies are basically exiting that argument, and the country itself. In New York, I'm Mark Garrison, for Marketplace.

About the author

Mark Garrison is a reporter and substitute host for Marketplace, based in New York.

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