Levin-backed legislation aims to curb pace of companies moving offshore for lower taxes
While Perrigo Co. plc has already cut its tax burden by moving offshore in the $8.6 billion blockbuster deal with Irish pharmaceutical maker Elan Corp. that it says will allow it to expand globally, other U.S. corporations could have a hard time pulling off similar deals.
New federal legislation aims to change the thresholds for companies to move offshore. The bill is an attempt to stave off an exodus of domestic corporations to countries with lower tax rates, but many have strong doubts that the proposal will ever become law.
Although Perrigo’s corporate headquarters and functions remain in Allegan, the new corporation formed through the transaction with Elan is domiciled in Dublin, Ireland, a nation with a far lower corporate tax rate than the U.S., 12.5 percent versus 35 percent.
U.S. Sen. Carl Levin of Michigan and 13 other Democratic senators now want to reign in so-called corporate inversions. Legislation that Sen. Levin introduced in late May would raise the threshold under which a corporation could do an inversion.
Federal law presently allows an inversion if just 20 percent of the corporation’s shares are owned by shareholders not in the U.S., or if at least 25 percent of the merged corporation’s sales, assets and employees are based where it’s incorporated.
Sen. Levin’s bill would increase the shareholder threshold to 50 percent. A merged company also would continue as a domestic corporation and be taxed accordingly if management and control remain in the U.S., and if 25 percent of its sales, employees or assets are located in the U.S.
The Perrigo deal, which closed in December, was structured to give Perrigo shareholders 71 percent control of the new corporation, while Elan shareholders retained a 29 percent stake.
The legislation is similar to provisions included in President Barack Obama’s 2015 budget proposal, except that it also would impose a two-year moratorium on corporate inversions to give Congress time to enact corporate tax reform.
Although the legislation faces a tough road in Congress amid the broader debate of tax reform — Bloomberg.com reported that it “stands little chance of becoming law” — it does bring the issue of corporate inversions and the need for corporate tax reform to the forefront.
Sen. Levin, in a May 20 speech on the Senate floor, called corporate inversions a “tax avoidance scheme” and “an enormous loophole that allows companies to avoid billions in taxes without any significant change in where they operate, where their profits are generated, or the location of the executives who manage and control these corporations.”
He cited Pfizer Inc.’s unsuccessful acquisition proposal for U.K.-based AstraZeneca plc that would have included a corporate inversion, costing the U.S. treasury some $1 billion annually.
Bloomberg.com reported that there have been 11 inversions involving U.S. corporations since 2011.
“Some companies that believe in meeting their tax obligations are under competitive pressure to invert. It is clear that dozens, perhaps scores of companies are preparing to file their change-of-address cards, and in doing so, avoid billions in U.S. taxes,” Levin said. “That burden doesn’t just go away. Either our remaining constituents must pick up the tab, or the loss of Treasury revenue adds to the federal deficit.”
Republicans generally oppose the bill, preferring instead to address the issue through broader corporate tax reform.
Perrigo — which embarked on the Elan acquisition as a platform for global expansion — declined to comment on the efforts to crackdown on corporate inversions, which may not be limited to just large corporations.
Attorney Phil Torrence of the Kalamazoo office of Honigman, Miller, Schwartz and Cohn LLP says he’s had clients in the life sciences and medical device sectors who have looked at the move. By finding a company to acquire and domiciling themselves in Ireland, for example, they can take advantage of the lower corporate tax rate, which then makes them a more attractive acquisition target for a strategic buyer, he said.
Torrence sees the practice increasing as long as the U.S. corporate tax rate remains high and out of sync with the rest of the world.
“It’s been going on for quite some time but it’s really gaining steam for corporations that are going global or corporations that are already global, and they’ve built up a whole lot of cash and can’t bring it back to the U.S.” because of high tax rates, said Torrence, who doubts Sen. Levin’s legislation will gain much traction this year.
“I’d be surprised if much change happens,” he said. “It just takes a long time to get something like that through Congress.”
In response to Sen. Levin’s bill and a similar bill in the U.S. House introduced by his brother, Rep. Sander Levin, a consortium of large corporations reiterated its call for corporate tax reform. The Alliance for Competitive Taxation — whose members include Kellogg Co. in Battle Creek and Midland-based Dow Chemical Co. — favors a 25 percent U.S. corporate tax rate and putting an end to tax breaks.
“The fact that we’ve seen a growing number of American companies in recent months announce plans to merge with foreign companies and reincorporate abroad only highlights the many deficiencies of the U.S. tax code,” the Washington, D.C.-based Alliance for Competitive Taxation said in a statement after Sen. Levin introduced his bill. “We continue to believe that leaders in Washington should focus on enacting comprehensive tax reform that establishes a modern, globally-competitive tax system and aligns the United States with the rest of the world.
“If we want to encourage companies to locate, invest and create jobs in the U.S., then we have to address the root cause — America’s broken tax code.”
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