We’ve been hearing a lot about corporate “inversions” in the industry, of late. What exactly are inversions? Why have U.S.-based companies been employing this strategy? And how havethe new U.S. Treasury rules changed the playing field for corporations seeking relief from the highest corporate taxes in the world?
The U.S. tax code imposes a marginal rate of up to 35% at the federal level (39.2% once state taxes are accounted for) according to the 2013 OECD Tax Database. The global average corporate tax is much lower than that of the U.S., at 25%, and Ireland has the lowest overall rate at 12.5%. In an effort to protect more earnings from high U.S. rates, corporations have increasingly resorted to corporate inversions.
A corporate inversion is a transaction in which a U.S. based multinational corporation restructures so that the U.S. parent is replaced by a foreign parent, in order to avoid U.S. taxes.
With growing Administration alarm about the reduction in federal revenues as a result of these inversions, on September 22nd the U.S. Treasury Department issued a notice explaining that it and the IRS intended to issue regulations “to combat inversions by reinterpreting its regulatory guidance of a number of Tax Code provisions,” according to ISI analyst Terry Haines...
inversions, with relocations of corporate headquarters primarily to Ireland and Canada. In 2014 alone there have
been eight attempted inversions in the industry, only four of which were successfully completed. Of the remaining
four, Auxilium has been approached by Endo (a pre-rule-change-inverted company) for takeover and has since
rescinded an inversion offer for QLT; and Salix (Cosmo), as well as AbbVie (Shire) (despite a $1.64B poison pill!) have deemed that the new requirements and diminished benefits of inverting have been detrimental enough to kill their deals. Mylan, on the other hand, has deemed it worthwhile to restructure its agreement with Abbott in order to bring it into compliance with the new rules, and plans to complete its inversion in Q1 2015.
In its disappointment about the turn of events, AbbVie cited the Treasury department for “re-interpreting longstanding tax principles in a uniquely selective manner designed specifically to destroy the financial benefits of these types of transactions.” Whether the U.S. Treasury and IRS overreached their powers of interpretation of the existing code remains to be determined, but for some of these companies, a significant opportunity has been lost. As AbbVie Chairman and CEO Richard A. Gonzalez has noted, the U.S. Department of Treasury “may have destroyed the value in this transaction [with Shire], but it does not resolve
a critical issue facing American businesses today… The U.S. tax code is outdated and is putting global U.S.-based
companies at a disadvantage to foreign competitors in an area of critical importance, specifically investing in the
United States. Comprehensive tax reform is essential to create competitiveness and to stimulate investment in the
Published in the Life Sciences Executive Network "Biotech Bulletin" Fall 2014.