WASHINGTON (Reuters) – When a series of big US companies last year moved to reincorporate abroad in inversion deals, some Republican lawmakers and tax policy critics blamed the high US corporate tax rate. Lowering it, they said, would keep companies from fleeing the country.
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 US federal corporate rate of 35 per cent.
Most were well below it. The average effective tax rate for the six companies was 20.3 per cent for 2011-2013, Reuters found, using an estimation method reviewed by tax experts that was based on public data for US profits and US 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 analysed 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 US 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 per cent, 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 US 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 per cent over the period.
Tax inversion deals are mainly driven by efforts to shift profits out of the US and to access overseas earnings at little or no cost in US tax, tax specialists said.
“The issue is much broader than the US 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 US 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.
A close look at of some of the six deals suggests no direct connection with the 35-per cent U.S statutory rate.
For instance, Pittsburgh-based pharmaceuticals company Mylan is buying the non-US 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 per cent. However, Mylan’s global effective tax rates, as disclosed in the company’s annual reports to investors, were 16.2 per cent in 2013, 20.0 per cent in 2012 and 17.7 per cent in 2011.