By: Hannah Ishmael
In a trend that picked up pace last year, many large US corporations have been entering into various merger and acquisition deals with foreign companies to avoid the high US tax rate of 35%. The US government has been highly critical of these so-called “tax inversion” deals and has been debating steps that may need to be taken to deter companies from opting for such deals.
In the latest move to stop such deals, US Treasury Secretary Jacob Lew is planning to enforce regulatory actions to prevent such agreements between companies. In a tax reform seminar sponsored by the Tax Policy Center at the Urban Institute, he said that he will take measures against these deals in the near future.
Tax Inversion Deals
US companies have been involved in tax inversion deals for decades. However, a surge in such deals has been observed since the mid of last year. Companies either merge with or acquire foreign companies in countries where the corporate tax rate is lower than that of US. The merger or acquisition allows them to re-domicile to country with a lower tax rate.
The re-domiciling allows these corporations to pay lower taxes and also gives them access to foreign cash flows that would have been taxed heavily otherwise. Since 2013, thirteen deals worth $178 billion have taken place. While companies across all industries have been involved in tax inversion acquisitions, some of the biggest and most high profile deals fall into the health sector.
AbbVie Inc. (ABBV) acquired Dublin-based Shire PLC (ADR) (SHPG) for $54.8 billion in July this year to benefit from Ireland’s tax rate of 12%. The other healthcare-related deal is the highly publicized merger between Medtronic, Inc. (MDT) and Covidien plc (COV). Medtronic announced the deal in June, and will pay $42.9 billion to acquire Covidien, which is also based in Ireland.
