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 But a Reuters analysis of the taxes being paid by the six largest
companies known to be doing inversions in late 2014 and early 2015
showed that, even before the deals, all were paying below the
statutory U.S. federal corporate rate of 35 percent.
Most were well below it. The average effective tax rate for the six
companies was 20.3 percent for 2011-2013, Reuters found, using an
estimation method reviewed by tax experts that was based on public
data for U.S. profits and U.S. taxes.
The Reuters analysis suggests that the surge in inversion
transactions may not have had much to do with the statutory
corporate income tax. Moreover, it shows Washington's current debate
over business tax reform may be too focused on the statutory rate,
neglecting effective rates and the incentives that companies have to
shift profits abroad.
The six companies analyzed were Medtronic Inc, Applied Materials
Inc, Steris Corp, Mylan Inc, C&J Energy Services Inc and Burger
King, which has been renamed Restaurant Brands International Inc.
 All six have recently completed or are in the midst of completing
inversion-type deals, despite a Treasury Department crackdown in
September that slowed inversion deal-making.
Inversions have been around for three decades, but they became more
common in recent years. Guided by tax lawyers and accountants,
companies have done more than 50 such deals since the 1980s; about
half of them just since 2008.
The deals typically involve a U.S. company buying a smaller foreign
rival, then taking on its nationality for tax purposes, while many
core operations remain in the United States.
The six companies studied have themselves disclosed 2011-2013
effective tax rates averaging 27.8 percent, or 7.5 percentage points
higher than the Reuters calculation.
The discrepancy with the Reuters figure is likely because the
companies' figures include not just U.S. federal taxes, but all
taxes, including state, local and foreign.
In a project for Reuters, the Institute on Taxation and Economic
Policy (ITEP), a tax policy think tank in Washington, looked at the
six companies' data somewhat differently, stripping out certain
accounting adjustments, and found an average effective tax rate of
22.2 percent over the period.
Tax inversion deals are mainly driven by efforts to shift profits
out of the U.S. and to access overseas earnings at little or no cost
in U.S. tax, tax specialists said.
"The issue is much broader than the U.S. corporate tax rate being
high," said Steve Rosenthal, a senior fellow at the Urban-Brookings
Tax Policy Center, a centrist think tank.
To be sure, some other tax experts and activists say the statutory
rate is the key, not only to inversions, but to broad U.S. business
competitiveness around the world.
"You fix the rates, you fix it all," said Grover Norquist, a
Republican activist and president of Americans for Tax Reform, which
advocates for lower taxes and smaller government.
 (For related graphic on statutory corporate tax rates around the
world, see: http://link.reuters.com/qak93w)
NO DIRECT CONNECTION
A close look at of some of the six deals suggests no direct
connection with the 35-percent U.S statutory rate.
For instance, Pittsburgh-based pharmaceuticals company Mylan is
buying the non-U.S. generic drug business of Chicago's Abbott
Laboratories to create a combined company incorporated in the
Netherlands and managed from Pennsylvania.
The Netherlands’ statutory rate is 25 percent. However, Mylan's
global effective tax rates, as disclosed in the company's annual
reports to investors, were 16.2 percent in 2013, 20.0 percent in
2012 and 17.7 percent in 2011.
ITEP pegged Mylan's U.S.-specific effective tax rate at 20.5 percent
on average for those same years, and the Reuters analysis found it
to be 19.7 percent.
When Mylan announced the Abbott deal in July 2014, it said it
expected it to bring many advantages and "to lower Mylan's tax rate
to approximately 20-21 percent in the first full year, and to the
high teens thereafter." A spokeswoman for Mylan declined to comment
and referred questions to past statements.
[to top of second column] |
In another deal, Steris Corp, based near Cleveland, is buying out
the UK's Synergy Health Plc, with the combined company to be managed
from Ohio, but incorporated in Britain where the statutory corporate
tax rate is 21 percent.
Reuters found a 2011-2013 U.S.-specific average tax rate for Steris
of 17.2 percent; ITEP's calculation came to 16.6 percent.
The company has disclosed global effective tax rates averaging 32.1
percent for the same period. A Steris spokesman said the company
expects its effective tax rate beginning in 2016 to be about 25
percent. "This transaction is not being driven by tax rates,” he
said.
HIGHEST RATE
The U.S. statutory rate is high. Tack on an average of state and
local corporate rates and it's 39.1 percent. No major country has a
higher combined rate. The next highest are Japan at 37 percent and
France at 34.4 percent.
But the U.S. tax code is uniquely complex. Big companies use
elaborate strategies to exploit loopholes to cut their tax costs,
which they say shareholders expect them to do.
The gap between the statutory rate and what companies really pay is
hard to measure because their tax returns are, of course,
confidential. Financial report data can furnish estimates of
effective rates, but there is no standard way to do this. Even when
measuring marginal effective tax rates, seen by tax experts as the
best test of business investment decisions, it's hard to know the
true U.S. tax burdens of large corporations.
Most lawmakers agree inversions are a problem because they erode the
U.S. corporate tax base. Corporations today only provide about 10
percent of U.S. government revenues, down from 30 percent in the
1950s.
In his 2016 budget last week, Democratic President Barack Obama
proposed steps to curb inversions and what his administration sees
as the incentives for doing them. The Republican-controlled
Congress, however, is unlikely to agree with his proposed reforms,
which may be dead-on-arrival.
One of Obama's goals is tightening a rule that makes business
interest tax-deductible and helps companies shift profits out of the
United States via interest payments on loans from foreign
affiliates. This is known as earnings stripping.
Another is ending the "deferral" rule that says companies don't have
to pay income tax on active overseas profits, as long as those
profits don't enter the United States. Companies have about $2.1
trillion in profits abroad. Some came from foreign ventures; some
from earnings stripping, tax experts said.
The third target is abusive "transfer pricing." This involves
shifting profits out of the United States to lower-tax countries via
cross-border, non-market-based payments among the worldwide
affiliates of multinationals.
Cutting the 35-percent statutory rate would not change any of these
rules. And no politically realistic U.S. rate cut would be likely to
level the playing field with, say, Ireland, which has a 12.5 percent
statutory rate and is a popular destination for U.S. companies doing
inversions, let alone tax havens such as Bermuda, which charges no
corporate income tax at all.
"Until we address earnings stripping and the transfer of intangible
rights abroad, we're always going to have this incentive for foreign
companies to combine with U.S. companies and strip the U.S.
corporate tax base,” said Rosenthal.
(Reporting by Kevin Drawbaugh; Editing by Amy Stevens and Martin
Howell)
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