Thursday, July 9, 2015

Tax Inversions and Economic Reality

We're written before about tax inversions and economic reality.  Businesses naturally gravitate to favorable environments.  Jobs follow.  A big part of a favorable environment relates to taxes.  Businesses, like all of us, prefer less taxes to more.  Unfortunately, our country has become uncompetitive in this regard and as a consequence businesses are leaving for more favorable terrain.  One way to accomplish this is a 'tax inversion' where a company in one country (say the US) merges with another company in a more favorable tax environment (say Ireland) and then also moves headquarters to that new location.  Politicians in the US were quick to implement laws making this process more difficult.  Unfortunately, when laws try to restraint natural economic forces the consequences are not pretty and the unintended consequences are downright ugly!  In our post, Mergers and Taxes, A Follow Up on 'Inversions', we concluded:

"A better long term strategy for the United States or any country is to recognize the economic reality faced by business and understand motivations for the inversions.  Imprisoning business with uncompetitive laws may work in the short run.  It will never work in the long run."

So pass a law to make inversions more difficult and the unintended consequence is that companies are still becoming targets due to the large tax burdens that can be avoided by being absorbed into other companies.  In an excellent article in Wednesday's Wall Street Journal, The Tax Inversion Wave Keeps Rolling Liz Hoffman, notes how Horizon, an inversion last fall and now headquartered in Ireland, is now acquiring other companies.  In particular, Horizon is going after Depomed, a California pharmaceutical company.  Hoffman notes that Depomed paid 38% in the US last year but that Horizon's acquisition could lower the rate (under Irish law) to 'low 20's' and that Irish Corporate tax rates are 12.5%.

So which is better 38% of nothing or 12.5% of something?  The answer is obvious to all but representatives who refuse to take steps to make our country more competitive, preferring instead to play Whack a Mole in denying economic reality, smacking every unintended consequence that arises with new laws.

An interesting chart from the article showing other deals is below:

All the best,



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