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News : Irish Economy Last Updated: Mar 25, 2015 - 7:01 AM

US tax inversions screw-up Ireland's national accounts; Bring few benefits
By Michael Hennigan, Finfacts founder and editor
Jun 29, 2014 - 4:32 PM

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Source: Bloomberg

Ireland is a big beneficiary of US tax inversions but they screw-up the national accounts and bring few benefits - - including intermittent travel trips by directors for board meetings to comply with Irish law, by showing that "central management and control of a company" is in Dublin when in reality it remains in the United States.

SFGate, the Hearst-owned website sister-site of the San Francisco Chronicle, says this week-end: "Seagate Technology, inventor of 5.25-inch hard disc drive, is a Silicon Valley company, right? Er, no, actually it's Irish. Jazz Pharmaceuticals, the Palo Alto developer of a host of new drugs, is also an Irish company. Applied Materials, the 37-year-old semiconductor, equipment and solar company in Santa Clara, is about to turn Japanese. All three have undergone a 'corporate inversion,' also known as a 'tax inversion,' whereby a business acquires an overseas company, switches official tax domicile to the overseas country, and - - voila! - - no more US taxes on overseas earnings."

Pfizer Inc. which was founded by two German immigrants as Charles Pfizer & Company in Brooklyn, New York in 1849, recently tried to become British to lower it's tax bill through the acquisition of  AstraZeneca, a UK pharmaceutical giant that was founded in Sweden.

Today The Chicago Tribune says Walgreen Co. is at a crossroads, but it may not be "at the corner of happy and healthy" as its advertising slogan suggests.

The nation's largest drugstore chain is considering a move that would allow it to significantly cut its tax bill and increase profits. But it's being painted by critics as un-American for looking to make money for shareholders through financial engineering at the expense of the communities that it grew up in. Walgreen is considering a so-called corporate tax inversion, in which an American company is able to incorporate abroad by acquiring a foreign company. The buyer, in effect, becomes a subsidiary of a foreign parent.

Walgreen, founded in Chicago in 1901, would accomplish an inversion by completing its purchase, which is expected to happen in early 2015, of Switzerland-based Alliance Boots and moving its corporate home to Europe's largest pharmacy chain - -  if the company becomes Swiss, it may well later move onto Ireland depending on the outcome of a tax dispute between the EU and Switzerland - - the latter has exemptions for companies that source most of their earnings from overseas.

The Tribune reports that nearly one-quarter of Walgreen's $72bn in sales in its last fiscal year came from the federal health programs Medicaid and Medicare.

"I am troubled by American corporations that are willing to give up on this country and move their headquarters for a tax break," Senator Dick Durbin, Democrat of Illinois, said in an interview. "It really speaks to your commitment."

In 2009 Senator Durbin in an interview with a Chicago radio station came to a stark conclusion: the banks own the US Senate.

"And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place."

Bloomberg has reported that about 41 US companies have reincorporated in low-tax countries since 1982, including 11 since 2012. Four more plan to do so in the coming year. "A lot of drug companies are doing it, and low-tax Ireland is a popular corporate home. The pace is quickening despite a 2004 law that legislators had promised would end the practice, and despite two decades of efforts by the Internal Revenue Service to rein it in.

Nowadays, most companies achieve inversion by acquiring a foreign company at least 25% their size. That’s how Medtronic, the medical device giant founded in a Minneapolis garage in 1949, hopes to turn Irish and how Pfizer proposed to go British, through a takeover of AstraZeneca that has since been rejected. A change of address doesn’t necessarily mean a real move. Companies are free to keep their top executives in the US, and most of them do."

S&P 500

Allan Sloan of  Fortune wrote this month that until about four years ago, there was a major downside for big companies thinking of leaving the US: an impact on their stock price. "That’s because companies that left the US got thrown out of the Standard & Poor’s 500 index. From 2002 through 2009, S&P tossed nine companies off the 500 when they moved offshore."

Index funds dumped the shares of the offshored companies and that hit the price.

However, in 2010, S&P reversed course, and ultimately added back eight of the ousted firms to its 500.

David Blitzer, chairman of the index committee of S&P Dow Jones Indices, said his firm was catching heat from companies that had been tossed out of its indexes, and from investors who wanted their index investments to include those companies.

Standard & Poor's had shown how craven it had been to Wall Street before the crash and why would it change?

US corporate tax

The US federal headline rate is 35% compared with the Irish headline rate of 12.5% and the UK rate will be 20% in 2015 -- down from 28% in 2010.

The average developed country rate is about 25% according to the OECD (Organisation for Economic Co-operation and Development) and The Wall Street Journal reported in 2012 that total federal corporate taxes paid fell to 12.1% of profits earned from activities within the US in fiscal 2011, which ended Sept. 30, 2011, according to the Congressional Budget Office. That's the lowest level since at least 1972. And well below the 25.6% companies paid on average from 1987 to 2008.

Source: Wall Street Journal
Corporate income-tax receipts typically fall during recessions, and they declined sharply after the 2008 financial crisis, which wiped out big swaths of profits across the huge financial sector. But US profits rebounded sharply in 2011, while tax receipts stayed low.

The Tax Foundation, a think-tank has reported a higher effective rate on investment while effective rates for tech and pharma companies with significant overseas business, have been falling in recent decades: see here and here.

President Obama has called for a 28% headline rate and Republicans want a 25% rate with the reduction coinciding with various tax expenditures (allowances)/ loopholes being abolished. However, the problem is that the impact of changes would have varying sectoral impacts - - which means lobbyists are deployed to protect vested interests.

There is also a reluctance in Congress to support tax cuts for business following  Wall Street bailouts during the financial crisis.

Senator Rob Portman, Republican of Ohio, and a former chief trade negotiator for the United States wrote in The Wall Street Journal this week

  • "Here's what the US can do to catch up: First, cut the corporate tax rate to 25%, bringing America in line with the OECD average. That would undoubtedly spur job creation. It would also bolster revenues, as the nonpartisan Joint Committee on Taxation showed in its February analysis of Ways and Means Committee chairman Dave Camp's tax-reform proposal;
  • Second, simplify the tax code, which is rife with special preferences, and use the money saved from closing those loopholes to finance the 10%age point rate reduction;
  • Third, create a more competitive international tax regime. Roughly 80% of the world's purchasing power and 95% of its consumers are beyond US. borders, and American companies must be able to compete for these customers. As such, the US should adopt a territorial-type tax system that taxes active business income only where it's earned. In addition, we should implement clear, enforceable rules to prevent sheltering income in low-tax countries."

If a minimum foreign rate was proposed to avoid the incentive for more use of tax havens and low-tax jurisdictions in a territorial system, it would spell danger for Ireland.

Inversions and Ireland

Existing US rules mean a company can shift its tax residency through a deal that transfers more than 20% of its shares to foreign owners. Under the White House's 2015 budget that threshold would be raised to 50%, meaning a US company would have to buy a company larger than itself to qualify.

In the recent case of Medtronic, the medical device manufacturer, it plans to acquire Covidien, another US company, that already is "Irish."

This year has been marked by a big jump in mergers and acquisitions by big pharma companies.

Declining research and development productivity is the prime driver, says Mark V. Pauly, Wharton School of Business professor of health care management. “For the most part, this seems to me like rearranging the deck chairs more than major changes,” he notes. “Of course, it’s billions of dollars flowing hither and yon in the market, but a very large fraction of the new innovative activity in the pharmaceutical sector isn’t coming from these big firms. That is, in part, why they are doing all this rearrangement. They’re trying to recapture the magic.”

According to Pauly, the current rush of M&A deals was “inevitable because R&D spending by the big companies wasn’t paying off.” He says the companies involved may use the acquisitions or divestitures as an occasion to cut their head count of researchers.

“It looks like the old pharma model of a giant company funding a very large research operation has now been eclipsed by more productive research going on at smaller companies and biotechs,” Pauly adds.

The Financial Times says "inversions offer...advantages by making it easier for companies to escape US tax on their offshore intellectual property, cutting US tax bills by loading their domestic businesses with debt, and making low foreign tax rates permanent. They halt the build-up of offshore cash. The cash pile is larger for healthcare companies than any sector except technology, accounting for 15% of the $947bn total, according to a recent report by Moody’s."

Last year Perrigo of the US acquired Irish biotech company Elan, which had been reduced to a shell operation, and it redomiciled in Ireland, where it said it could cut its global tax rate to about 17% in tax, rather than an estimated 30% effective rate it was paying in the US.

Also in 2013, New Jersey-based Actavis’s acquisition of Warner Chilcott, an Irish drugs firm, had a tax angle with its rate due to fall to 17% from an effective rate of 28% tax, enabling
Actavis to save an estimated $150m over the two years.

Elan, the most valuable Irish company in 2001 and 20th most valuable drugs company in the world, was acquired by the Wal-Mart white goods supplier without a whimper in Ireland from policy makers in the year that Ireland was to be recognised as a world-class knowledge economy - - it sums up the shambolic enterprise policy.

Inversion companies mainly benefit professional service firms and partners from Arthur Cox, Ireland's biggest business law firm, wrote in an April 2014 article : "in the recently announced inversion of Endo Health Solutions to Ireland, the target company was incorporated in Canada. Accordingly, it is likely that there will be a significant increase in the number of inversions to Ireland where the target company is a non-Irish company."

In the same month the FT wrote: "The global headquarters of Endo International is so new that, apart from a few desktop computers, the most visible purchase to date is the Nespresso machine in the kitchen. Located in the basement of a Georgian house in central Dublin, the company, which makes branded and generic medicines, does not even have a brass plate on the door.

“We are just getting started,” said Blaine Davis, senior vice-president for corporate affairs, who will run the office with a skeleton staff on behalf of a group with annual sales of $2.6bn.

The activity in a basement in Fitzwilliam Square will not do much for the Irish economy but this is another "Irish" company that will impact Ireland's nationals accounts.

However, nearby is the virtual office of King Digital Entertainment Plc, the maker of the hugely successful mobile video game ‘Candy Crush Saga', which had an IPO on the New York Stock Exchange last March -- see page 2 here [pdf] - - it operates from the offices of William Fry, another Dublin business law firm and its Irish holding company doesn't even have a skeleton staff in Dublin.

“The Irish tax rate on corporate business is very clear - it’s 12.5% - we don’t have any brass plate companies like others do have. The tax rate in Ireland is what it says on the tin,” said Brendan Howlin, minister for public expenditure and reform, last February.

Just another in the litany of tax-related examples of official economies with the truth.

Tom Bergin of Reuters reported this month that in November, Ernst & Young, one of a number of tax advisors which advocated the tax changes that made Britain a magnet for US corporations, published a survey saying that 60 multinational companies were eyeing a move to the UK.

EY said this could create over 5,000 jobs and bring in over £1bn a year in additional corporation tax, the UK's corporate income tax.

However, a Reuters review of company filings and other statements from the seven companies, news reports and interviews with tax advisors and company executives, suggested corporate moves may not mean so many new jobs.

Reuters said the seven companies it examined had a combined 73 directors. Only 14% reside in Britain, up from 4% before the companies moved, company filings, records at the UK companies register and other company statements show.

For the six previously US-incorporated companies which shifted to Britain, 80% of directors continued to reside in the United States after the move.

Accounts for the companies also show little benefit to the UK exchequer from the corporate relocations.

In Ireland when Medtronic completes its Covidien acquisition, together with Eaton Corporation of Ohio which became Irish in November 2012, they will have combined payrolls of 180,000 compared with the 172,000 employed in foreign-exporting firms after 60 years of promotion.

GDP (gross domestic product) is not a reliable metric of Irish economic performance and GNP (gross national product) which mainly excludes the profits of foreign-owned firms, has been made unreliable by the arrival of inversion companies.

Prof John FitzGerald of the ESRI (Economic and Social Research Institute) said in a paper published in 2013: "The treatment of these redomiciled plcs in the national accounts differs from the treatment of the profits of many of the multinationals already operating in the Irish economy in the manufacturing or services sector because, crucially, these latter multinationals are not head quartered in Ireland."

Adjusting GNP to take account of these flows finds the contraction in the Irish economy was much deeper in 2009, the Irish economy actually contracted in 2010, rather than showing moderate GNP growth, and was marginally weaker in 2011, while GNP growth in 2012 was approximately 1 percentage point lower than official estimates.

FitzGerald said in his paper [pdf]: "The change in the undistributed profits as a share of GNP is a measure of the extent to which the measurement of GNP has been inflated by the activity of these firms over the last five years, without a compensating reduction affecting GNP through increased factor outflows.

There is also a corresponding implied adjustment needed in the official current account figures, as shown in Table 2. This would imply that, instead of having a current account surplus of around 6.1% of GNP in 2012, the underlying surplus was closer to 0.6% of GNP."

Simply put, it's foolish to take Irish national accounts data cannot be taken at face value

The GNP level also has an impact on the "the base on which Irish contributions to the EU Budget are calculated. Thus, while these companies confer no significant benefit on the Irish economy in terms of employment or taxes, they do give rise to a higher EU budgetary contribution."

The data show that incoming net profits from redomiciled Plcs have grown exponentially since 2009, up from €1.5bn to €7.4bn in 2012.

In 2010 there was a 2% gain in GNP from redomiciled firms and there is obvious great potential for ministers to declare fairytales to be facts -- it would hardly be a new development.

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