The practice of "corporate inversions" – US companies buying overseas businesses to avail of lower tax rates such as in Ireland – has sparked political debate on the issue in the US presidential campaign.
Two pharmaceutical firms, New York-based Pfizer and Dublin-based Allergan, confirmed last week they were in merger talks to create a $330 billion entity that would be the largest "inversion," shift Pfizer's corporate base to Ireland's lower tax rate and dramatically cut its taxes.
Republican frontrunner Donald Trump has laid blame for the "corporate inversions syndrome" at the door of the US politicians for poor tax policy rather than the companies, saying there is "no way to stop it really other than lowering taxes".
Mr Trump said it was “prohibitive” for companies to repatriate money from overseas and they “would have to be fools to bring it in”.
"In the old days you would leave New York and go down to Florida, or you would leave New Jersey to go to Texas to save taxes," he told Bloomberg.
‘Compete better’
“Now because of the way the world is so different, you leave the
United States
and you go to Ireland, and different places in
Asia
and you go to
Europe
. It is a different world and we have to compete better.”
More and more American companies have been eyeing foreign acquisitions in recent years to protect income from high US corporate tax rates and to tap vast profits sitting in overseas subsidiaries.
Ireland’s 12.5 per cent corporate tax rate is significantly lower than the US top rate of 35 per cent, which has prompted American multinationals to seek out international mergers with Irish companies that would allow them to shift their corporate headquarters. Allergan paid an effective tax rate of 4.8 per cent compared with Pfizer’s 25.5 per cent, a big gap that the latter will seek to close.
The rise in the rate of corporate inversions has alarmed US politicians but there are deep divisions between Democrats and Republicans on how to resolve the issue. Mr Trump, a property tycoon and reality TV star, said he would reduce the US corporate tax rate to 15 per cent and has proposed a once-off repatriation tax of 10 per cent on the estimated $2 trillion in hoarded profits stored overseas by US firms.
One-off tax
His rivals in the Republican race for the
White House
have proposed similar moves. Former Florida governor
Jeb Bush
would reduce the corporate tax rate to 20 per cent and impose a one-time tax of 8.75 per cent on foreign profits when brought back by US companies.
Hillary Clinton’s campaign team has promised to crack down on “inversions” and overhaul the tax code to encourage investment in the US rather than “shipping earnings and jobs overseas”.
Another candidate in the Democratic race Bernie Sanders has said that he thought Pfizer's proposed merger with Allergan "stinks" and that he would end "those types of loopholes" if he was president.
President Barack Obama has joined fellow Democrats in chastising US companies who use cross-border mergers to shield profits from American taxes, accusing them of being "corporate deserters."
He singled out Ireland in his criticism last year, condemning American companies that “magically” become Irish through takeovers.
The Treasury Department has said only legislation passed by the US Congress can end inversions and this is unlikely given the divisions between Democrats and Republicans.
