profit shifting

Bucking the conventional wisdom, a Reuters analysis has found that the recent surge in corporate inversion deals may not have much to do with the high statutory tax rate in the United States.

Most of the six largest companies known to be doing inversions in late 2014 and early 2015 paid taxes at well below the statutory 35% rate, Reuters says. The average effective tax rate for the companies was 20.3% from 2011 to 2013.

The analysis “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,” Reuters concludes.

Inversion 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 Treasury Department cracked down on the practice in September but the six companies that Reuters analyzed — Medtronic, Applied Materials, Steris Corp., Mylan Inc., C&J Energy Services, and Burger King — recently completed or are in the midst of completing inversion-type deals.

A close look at of some of the deals “suggests no direct connection with the 35% U.S statutory rate,” according to Reuters.

For example, Mylan, which is buying the non-U.S. generic drug business of Abbott Laboratories to create a combined company incorporated in the Netherlands and managed from Pennsylvania, had an average U.S.-specific tax rate for 2011 to 2013 of 19.7%.

The U.S. statutory rate is relatively high, Reuters noted, but the tax code is uniquely complex and “big companies use elaborate strategies to exploit loopholes to cut their tax costs.”

“The issue is much broader than the U.S. corporate tax rate being high,” Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, told Reuters.

In his 2016 budget last week, President Barack Obama proposed curbing inversions by, among other things, tightening a rule that helps companies “strip” earnings by shifting profits out of the United States via interest payments on loans from foreign affiliates.

“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,” Rosenthal said.

Source: Reuters

Image: Thinkstock

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