An emerging trend called “inversions” allows companies to save millions of dollars in taxes by renouncing their citizenship so to speak and reincorporating in a tax friendly jurisdiction through an offshore merger. A smart strategy that safeguards capital from government theft and allows the company to utilize the “additional” cash to reinvest into the business in order to create more value or return funds to shareholders.
“It’s almost like the holy grail,” said Andrew M. Short, a partner in the tax department of Paul Hastings, which advises a number of American corporations on deals. “We spend all of our time working for multinationals, thinking about how we’re going to expand their business internationally and keep the taxation of those activities offshore,” he added.
Reincorporating in low-tax havens like Bermuda, the Cayman Islands or Ireland — known as “inversions” — has been going on for decades. But as regulation has made the process more onerous over the years, companies can no longer simply open a new office abroad or move to a country where they already do substantial business.
Instead, most inversions today are achieved through multibillion-dollar cross-border mergers and acquisitions. Robert Willens, a corporate tax adviser, estimates there have been about 50 inversions over all. Of those, 20 occurred in the last year and a half, and most of those were done through mergers.
Ireland’s 12.5 percent corporate tax rate is a big draw for some companies. Earlier in the year, Actavis, based in Parsippany, N.J., bought Warner Chilcott, a drug maker with headquarters in Dublin, and said it would reincorporate in Ireland, leading to an estimated $150 million in savings over two years.
“These companies are doing the math and seeing they can save a couple hundred million dollars by doing this,” said Martin A. Sullivan, chief economist at Tax Analysts, a nonprofit group that publishes analysis about global taxes.
The first corporate inversion occurred more than 30 years ago, when McDermott Inc., an oil and gas company, moved to Panama in 1982. Twelve years later, Helen of Troy, which makes household goods like blow dryers, reincorporated in Bermuda. Both those inversions got the attention of the Internal Revenue Service, which enacted rules intended to stem the outflow of corporate tax dollars from the United States.
But the regulations were largely ineffectual and did not stop another wave of inversions from taking place in the late 1990s and early 2000s. Tyco went to Bermuda in 1997 to lower its tax bill. A year later, Fruit of the Loom moved to the Cayman Islands. And in 2001, Ingersoll-Rand reincorporated in Bermuda.
That flurry caught the attention of Congress, and Senators Charles E. Grassley and Max Baucus proposed legislation to further curtail inversions. “These corporate expatriations aren’t illegal,” Mr. Grassley said in 2002. “But they’re sure immoral.”
Quite the opposite, Mr. Grassley. To protect one’s assets from theft is not only the right thing to do but also the fiduciary responsibility of management.
Many companies that have recently moved their domicile for tax reasons have chosen European countries with low tax rates, like Ireland and the Netherlands, rather than be tarred by relocating to Bermuda or a Caribbean tax haven.
In moving to Europe, companies are looking to avoid the scrutiny brought on by moving to such obvious tax shelters, and take advantage of the more favorable business conditions in countries like Ireland, which also has a highly skilled work force.
Once inverted, companies save money through three main techniques. First, they do not have to pay the United States statutory tax rate of 35 percent on their worldwide earnings. That alone can amount to tens of millions in savings each year.
Many companies already get around this by keeping cash from foreign sales abroad. But inverted companies are free to use this cash without paying the steep repatriation tax faced by American companies.
Finally, multinationals that invert have an easier time achieving “earnings stripping,” a tax maneuver in which an American subsidiary is loaded up with debt to offset domestic earnings, lowering the effective tax rate paid on sales in the United States.