Irish Economy
US-Ireland Tax Inversions 600,000+ staff: Kenny, Noonan met with top US corporate lawyers
By Michael Hennigan, Finfacts founder and editor
Jul 8, 2014 - 3:07 PM

Printer-friendly page from Finfacts Ireland Business News - Click for the News Main Page - A service of the Finfacts Ireland Business and Finance Portal

Full-scale [pdf]

US-Ireland Tax Inversions 600,000+ staff:: It was revealed on Monday that Enda Kenny, taoiseach/ prime minister, and Michael Noonan, finance minister, met in June with lawyers from a US corporate law firm in June, to discuss the rising number of US companies seeking to change their tax residency and become "Irish" by locating a headquarters in Ireland - - most of these companies have no significant presence in Ireland but by the end of this year, the number of fake "Irish" companies may have a total payroll of over 600,000 which is  more than three times the head count of all foreign-owned exporting firms in Ireland.

Also on Monday, Congressman Sander Levin, whose brother Carl is a leading anti--abuse tax activist in the US Senate, disclosed that 47 US corporations have reincorporated overseas through corporate inversions in the last 10 years, far more than during the previous 20 years combined, according to new data compiled by the Congressional Research Service. In total, 75 US corporations have inverted since 1994 - - with one other inversion occurring in 1983. "What’s more, there are a dozen prospective inversion deals involving US corporations looking to reincorporate overseas, according to CRS."

The Levin brothers have introduced legislation providing that an inversion would not be recognized if the US stockholders have 50% of the shares or if 25% of the business activity is in the United States. Senator Levin's bill which would sunset in two years to provide time for tax reform.

The top lawyers of Cadwalader, Wickersham & Taft, met Kenny and Dublin  to sound them out on tax inversions as the desire of Pfizer, the drugs company to become British and Medtronic, the medical devices firm, which last month  announced a takeover of a rival , Covidien which is a US company that had become "Irish."

Cadwalader said in a statement Monday (see below) that

Beyond reputational risk, senior officials note that a continuing trend of inversion transactions may place Ireland in an untenable fiscal situation: the gain in tax revenues from redomiciled corporations is more than offset by the concomitant inflation of Ireland’s nominal Gross National Product, the basis for the calculation of the member states’ contributions to the EU budget. The resounding concern is that Ireland bears the brunt of the reputational and economic impact of inversions but reaps little of the job creation, substantive investment, economic growth or other tangible benefits typically afforded by traditional foreign direct investment."

Finfacts recently made these points:

Finfacts: US tax inversions screw-up Ireland's national accounts; Bring few benefits

The US companies make clear that that the headquarters in Ireland is a fiction to avail of lower taxes. Control remains in the United States.

There is also a backlash in the US and Allan Sloan, Fortune magazine columnist wrote on Monday:

Ah, July! What a great month for those of us who celebrate American exceptionalism. There’s the lead-up to the Fourth, countrywide Independence Day celebrations including my town’s local Revolutionary War reenactment and fireworks, the enjoyable days of high summer, and, for the fortunate, the prospect of some time at the beach. Sorry, but this year, July isn’t going to work for me. That’s because of a new kind of American corporate exceptionalism: companies that have decided to desert our country to avoid paying taxes but expect to keep receiving the full array of benefits that being American confers, and that everyone else is paying for. Yes, leaving the country–a process that tax techies call inversion–is perfectly legal. A company does this by reincorporating in a place like Ireland, where the corporate tax rate is 12.5%, compared with 35% in the US Inversion also makes it easier to divert what would normally be US earnings to foreign, lower-tax locales. But being legal isn’t the same as being right. If a few companies invert, it’s irritating but no big deal for our society. But mass inversion is a whole other thing, and that’s where we’re heading."

The Congressional Research Service said in a report: [News reports in the late 1990s and early 2000s drew attention to a phenomenon sometimes called corporate “inversions” or “expatriations”: instances where US firms reorganize their structure so that the “parent” element of the group is a foreign corporation rather than a corporation chartered in the United States in order to reduce the effect of the US corporate income tax. These corporate inversions apparently involved few, if any, shifts in actual economic activity from the US abroad, at least in the near term. Bermuda and the Cayman Islands—countries with no corporate income tax—were the location of many of the newly created parent corporations, and tax savings were the principal objective.

These types of inversions largely ended with the enactment of the American Jobs Creation Act of 2004 (JOBS Act, P.L. 108-357), which denied the tax benefits of an inversion if the original US stockholders owned 80% or more of the new firm. The Act effectively ended shifts to tax havens where no real business activity took place.

However, two avenues for inverting remained. The Act allowed a firm to invert if it has substantial business operations in the country where the new parent was to be located; the regulations at one point set a 10% level of these business operations. Several inversions using the business activity test resulted in Treasury regulations in 2012 that increased the activity requirement to 25%, effectively closing off this method. Firms could also invert by merging with a foreign company if the original US stockholders owned less than 80% of the new firm. Two features made a country an attractive destination: a low corporate tax rate and a territorial tax system that did not tax foreign source income. Recently, the UK joined countries such as Ireland, Switzerland, and Canada as targets for inverting when it adopted a territorial tax. At the same time the UK also lowered its rate (from 25% to 20% by 2015).

The post-2004 approaches to inversions no longer involved countries such as Bermuda and the Cayman Islands, but larger countries such as the UK, Canada, and Ireland. The UK, in particular, has become a much more attractive headquarters. Because of freedom of movement rules in the European Union, the UK cannot have anti-inversion laws, which may have played a role in both moving to a territorial tax and lowering the corporate tax rate.]

If the Medtronic-Covidien deal completes, the new group of 77,000 staff will put total payroll of the fake "Irish" companies at over 600,000.

Bloomberg estimated in June that about 31 publicly listed companies had changed their tax domiciles in recent decades and about half of them had become "Irish."

Fifteen of the 20 Irish companies on the Nasdaq stockmarket are American and Medtronic post-deal, together with Eaton Corporation, which became Irish in late 2012, together employ 180,000 while Accenture, the US consultancy, which changed its tax domicile from Bermuda in 2009 to Ireland - - to avoid the tax haven tag -- has a global payroll of 275,000.

“Barely a week seems to pass without news that another corporation plans to move its address overseas simply to avoid paying its fair share of US taxes,” said Democrat Ranking Member Sander Levin of the House Ways and Means Committee on Monday. “These corporate inversions are costing the US billions of dollars and undermining vital domestic interests. We can and should address this problem immediately through legislation to tighten rules to limit the ability of corporations to simply change their address and ship US tax dollars overseas.”

Estimate of US tax losses from inversions [pdf]

76 US companies that changed tax domicile

Update: Accenture, the management consultancy firm objected to Finfacts calling the firm "the US consultancy."

We have offered to replace the term "the US consultancy" with: "the former consulting arm of Arthur Andersen, the defunct US accounting firm."

Andersen Consulting was incorporated in Bermuda in 2001 and the global firm became Irish in 2009.

"None of our top executives are moving to Ireland, but that's totally irrelevant," said a company spokesman according to The Wall Street Journal in 2009 when the tax residency was moved from Bermuda to Ireland. "If it was a US corporation, how many CEOs live in Delaware?"

CREDIT: TAX POLICY CENTER

M&A Update | Inversions: The View from Ireland - - Cadwalader, Wickersham & Taft

Jul 07, 2014

On June 25, 2014, Ireland’s Taoiseach (Prime Minister) Enda Kenny and Minister for Finance Michael Noonan, among others, met with Cadwalader Chairman-elect and Corporate Group Co-Chair James C. Woolery in Dublin regarding foreign direct investment in Ireland and, specifically, the recent acceleration in U.S.-to-Ireland inversion transactions.

Observations

While there is bipartisan agreement in Ireland that its stable, 12.5% corporate tax rate is a cornerstone of the country’s strategy to attract foreign direct investment, grow employment and generate economic growth, there is considerable sensitivity within the highest levels of the Irish government to Ireland being perceived as a tax haven by the European Union (“EU”) and the U.S. Congress. The country’s tax regime is coming under increasing scrutiny by the EU for the aggressive tax planning strategies undertaken by foreign multinationals1, a practice termed “brass-plating.”

Beyond reputational risk, senior officials note that a continuing trend of inversion transactions may place Ireland in an untenable fiscal situation: the gain in tax revenues from redomiciled corporations is more than offset by the concomitant inflation of Ireland’s nominal Gross National Product, the basis for the calculation of the member states’ contributions to the EU budget. The resounding concern is that Ireland bears the brunt of the reputational and economic impact of inversions but reaps little of the job creation, substantive investment, economic growth or other tangible benefits typically afforded by traditional foreign direct investment.

Takeaways

It is important that U.S. and other multinational corporations seeking to re-incorporate in Ireland do so with an eye towards making meaningful connections with the country. Although not a requirement, corporations should consider tangible investments beyond the requisite minimum of board meetings, including the establishment of accounting and treasury, legal, intellectual property and business development functions; the appointment of an Irish advisory board or resident Irish directors; and the establishment of regional trading or intellectual property hubs. Among other things, an inversion with these features has the potential dual benefit of driving a positive market reaction around the company’s strategic goals in the EU and elsewhere, as well as protecting the deal from being singled out as an example of a “brass-plate” inversion. The rollout materials related to any inversion transaction should emphasize these investments. Taking steps such as these are key not only to navigating transactional, regulatory and reputational risk, but also to realizing the full strategic benefits conferred by an Irish domicile.


1 In May 2013, the U.S. Permanent Subcommittee on Investigations reported that Apple, Inc. had used offshore entities in Ireland to shelter $30 billion of net income from corporate tax during the period 2009-2011 and shift $74 billion of worldwide income to Ireland during the period 2009-2012, where it pays a corporate tax rate of 2% or less. In June 2014, the European Commission opened its own investigation into Apple’s international tax strategy and whether or not it constitutes a breach by Ireland of the EU's state aid rules.

© Copyright 2011 by Finfacts.com