Tax Inversions: Foreign Acquisitions for a Lower Tax Rate

As tax day approaches in the U.S. I thought it’d be appropriate to discuss a business tax trend. As you may be with your own return, U.S. corporations are looking for more tax advantages.  Many are seeking tax inversions, where they reincorporate in a new country with a lower tax rate as a result of an acquisition.

Last month, Chiquita acquired Fyffes, a food distributor located in Ireland in an all-stock deal valued at $526 million. Even though Chiquita is the acquirer, the new company will be headquartered in Ireland because of favorable tax conditions there. Companies in a variety of industries, from manufacturing to food to healthcare, are seeking tax shelters overseas, especially in Ireland.

In many cases, a tax inversion is an essential component of the acquisition. For example, Endo Health Solutions acquired Paladin Labs in November 2013 and expects to save $50 million in taxes a year by relocating to Ireland.

After Cleveland-based Eaton Corp acquired Ireland-based Cooper Industries in 2012 and moved its headquarters to Dublin, CFO Richard Fearon acknowledged that the tax advantage was significant.  “We chose Dublin because it does have a tax climate that’s a bit more favorable than some countries….,” he said. “The U.S. tax code, which is a global system, really penalizes companies for taking cash back to the United States.”

Fearon’s comment also highlights the main reason companies like Apple are hoarding cash overseas instead of bringing it back to invest in R&D.

Why This Is Important for You

President Obama and Congress are debating changing the tax code to prevent U.S. companies from benefiting from this tax advantage. Companies must currently transfer more than 20 percent of their shares to foreign owners to reincorporate in another country. Under the proposed changes, they would have to transfer more than 50 percent of their shares – basically they would have to buy foreign companies larger than themselves. The change would also block tax inversions for domestic companies with “substantial business activities in the U.S.”

We believe tax inversions will continue and may even accelerate as businesses try to take advantage of this tax benefit before it’s gone. Be on the lookout for more to come.

Additional Tax Inversions in the News

• Perrigo acquires Elan for $8.6 billion and reincorporates in Ireland.
• Actavis acquires Warner Chilcott for $5 billion and reincorporates in Ireland.
• Applied Materials acquires Tokyo Electron for $29 billion and reincorporates in the Netherlands.
• Omnicom and Publicis Groupe merge in $35.1 billion deal and reincorporate in the Netherlands.

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