Companies Fleeing Taxes Pay CEOs Extra as Law Backfires
Ten years ago, Congress passed a law intended to penalize chief executive officers whose companies shift their legal addresses to tax havens.
It hasn’t worked out as planned. Companies have found ways around the law that create new rewards for executives. When Actavis Inc. (ACT) changed its incorporation to Ireland in October, the New Jersey-based drugmaker helped CEO Paul Bisaro avoid the law’s bite by handing him more than $40 million of stock as much as three years ahead of its schedule, then promising him an additional $5 million to remain with the company.
The payouts to executives highlight the ineffectiveness of the 2004 law, which contained a series of provisions aimed at reducing the tax benefits of reincorporating overseas. In the past two years, a fresh wave of companies has fled the U.S. system to avoid hundreds of millions of dollars in taxes.
The 2004 law has “clearly been a failure” in halting the tax exodus, said Edward Kleinbard, a professor at University of Southern California’s Gould School of Law. “And it now has the perverse result of putting money into executives’ pockets sooner.”
The law imposes a special tax of 15 percent on restricted stock and options held by the most senior executives when a company reincorporates outside the U.S. Since the measure took effect, at least seven large companies have disclosed in securities filings that they risked triggering the tax. All took steps to shield their executives from having to pay.
Photographer: Andrew Harrer/Bloomberg
U.S. Senator Charles Grassley, a Republican from Iowa, right, said “these expatriations… Read More
Three of the companies’ boards simply picked up the tax bill for their executives, maintaining that the managers shouldn’t suffer for a decision that benefits shareholders.
At three other companies, including Actavis, the boards went a step further, helping them avoid the tax altogether by allowing restricted stock to vest early and for options to be exercised. Awarding the equity early raises the risk that the executives might quit or sell their shares, or get paid for meeting goals they never attain.