Friday 24 June 2016

Companies take €10bn hit after US announces tax rule change

Colm Kelpie and Gavin McLoughlin

Published 24/09/2014 | 02:30

US President Barack Obama
US President Barack Obama

ALMOST €10bn was wiped off the value of more than a dozen companies on both sides of the Atlantic yesterday after the US announced rules to curb so-called corporate inversions.

Junior Finance Minister Simon Harris signalled to the Irish Independent that Ireland had nothing to fear from the move by the US Treasury, which will, in theory, make inversions more difficult to do and less rewarding.

In an inversion, a US corporation, often a pharmaceutical company, avoids US taxes by buying or setting up a foreign company in a country and then moving its tax domicile to that country.

The new rules, effective immediately, will make new inversions more difficult but whether that will be enough to scupper deals that are pending or under consideration is not clear.

The action follows months of political debate in the United States. The shares of some companies involved in or interested in merger deals were dealt strong blows by the clampdown.

Pharmaceutical company AstraZeneca, which has operations in Ireland, slid 3.6pc, while fellow pharma company Shire's stock dropped 2.5pc.

Abbvie, which is also based in Ireland, slid 1.7pc in midday US trading, while Pfizer, the biggest US pharmaceutical company, dipped about 0.3pc.

More than a half dozen other companies in the United States and Europe saw their shares fall on the Treasury action.

Minister Harris said US companies are in Ireland for a variety of reasons.

"I think a lot of the issues that have been mentioned over the last number of months including inversions and everything else by President Obama, have been attempts to muddy the water. I don't think it's a fair reflection," Mr Harris said.

"This country doesn't in any way, shape or form seek such companies, we're only interested in seeking companies that bring real jobs and real benefit to the country."

"Inversions, brass-plate companies, call them what you will, they don't bring jobs, they don't bring tax contributions and they actually cost this country money in terms of European contributions."

Last month Endo, a pharmaceutical company that 'inverted' to Ireland last year, said it was confident that US rule changes won't force it back into the American tax regime.

Endo inverted to Ireland last year when it bought Dublin-based Canadian drug maker Paladin, and moved its global headquarters here, making the company liable for tax on profits at our 12.5pc rate instead of the 35pc charged by the US.

It was unclear whether the tougher stance adopted by the Obama administration on "inversion" deals, would end any of the handful of deals currently in the works.

Burger King, which is in the process of an inversion deal with Canada's Tim Horton's, said yesterday that it would proceed with its deal despite the US Treasury actions, saying the transaction was not about the tax benefits.

Investors had been expecting some action from the Obama administration to clamp down on tax-avoidance inversions but the steps announced were more far-reaching than anticipated, analysts at Deutsche Bank said.

The moves could kill off prospects of Pfizer returning to bid for AstraZeneca at the end of November, when a six-month cooling-off period imposed by British takeover rules comes to an end. (Additional reporting Reuters)

Q & A

Q: What is a corporate inversion? It sounds quite painful.

A: Many countries find it quite rewarding actually. What it means is that a US corporation, which is often times a pharmaceutical company, avoids US taxes by buying or setting up a foreign company in a country and then moving its tax domicile to that country. It essentially means it legally saves money on its tax bill.

Q: What is a corporate inversion? It sounds quite painful.

A: Many countries find it quite rewarding actually. What it means is that a US corporation, which is often times a pharmaceutical company, avoids US taxes by buying or setting up a foreign company in a country and then moving its tax domicile to that country. It essentially means it legally saves money on its tax bill.

Q: What has the US Treasury announced?

A: The Treasury Department on Monday announced new rules, effective immediately, that will reduce tax benefits accessible to companies that have inverted and make new inversions more difficult and less potentially rewarding.

The US President Barack Obama, who has sharply criticised inverting companies, said US Treasury's steps will discourage such deals, seen by some as a threat to the country's corporate income tax base.

Q: What will this mean for Ireland?

A: A number of US companies have inverted to Ireland to save money. President Obama said the new rules will not apply retrospectively, meaning companies that have already inverted to Ireland can breathe a sigh of relief. What's less clear is whether these rules will effect companies that are in the process of doing a deal. It will, one would assume, make it more difficult for companies seeking to do this in the future. However, some analysts have pointed out that this will not stop inversions as executive authority is more limited than legislation from Congress.

Q: Is this separate from the tax announcements from the OECD last week?

A: Yes it is, but it's a similar theme. There's a lot happening on the tax front recently. The OECD has been working on ways to tighten tax rules and international treaties, and to increase government tax information-sharing.

Its work is focusing on tax planning strategies by big multinational companies that exploit gaps and loopholes in tax rules to make profits 'disappear' for tax purposes.

These loopholes also mean profits can be shifted to locations where a company has little or no real activity, but the taxes are low, resulting in little or no overall corporate tax being paid. It's similar, but just a different announcement. We know, it's confusing.

Q: This really makes my head hurt. Is this the end of all this tax talk now?

A: If only. Expect more, potentially in next month's Budget, and expect more talk about the possible closure of the so-called Double Irish, where a proportion of a company's profits are routed through Ireland and end up in a tax haven.

Irish Independent

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