American medical companies are merging with smaller European companies, moving their headquarters overseas and avoiding U.S. corporate taxes in a move known as "inversion."
While some American corporations are believed to avoid paying their full tax bill by using business-friendly American tax loopholes, some corporations have decided to pull away from the U.S. corporate tax system all together through the process known as “inversion”.
According to the Congressional Research Service, 47 American companies have moved their operations overseas in the last 10 years in order to avoid U.S. taxes and legitimately pay the lower tax rates enforced by other countries. The 47 companies are a significant increase over the 29 companies that used the “inversion’’ system in the 20 years before 2004.
In order to qualify for the tax basis in the other country, the American company must merge with a business already established in the lower-tax country, and must do at least one quarter of its business overseas OR give the owners of the already established business at least one-fifth ownership of the newly created company.
This system has been used in the past by businesses as well-known as Fruit of the Loom and Tyco, which has moved its operation to Caribbean locations.
In an attempt to make it more difficult for American companies to use this tax-avoidance system, Rep. Sander Levin, D-Mich., distributed the CRS report, and pointed to the move by medical device company Medtronic, which relocated from Minneapolis to Ireland, where it merged with Covidien. Instead of paying the U.S. top tax rate of 35 percent, Medtronic now pays the Ireland corporate tax rate of 12.5 percent.
Another medical company, Pfizer, recently made the same sort of deal with a British firm AstraZeneca, for the same reason.
In May, Sen. Ron Wyden, D-Ore., proposed raising the percentage of ownership for the foreign- based company from 20 percent to 50 percent. Wyden’s suggestion was part of President Barack Obama’s 2014 budget.
“There is no policy reason to permit a domestic entity to engage in an inversion transaction when its owners retain a controlling interest in the resulting entity, [and] only minimal operational changes are expected," the Treasury Department wrote in an explanation of Obama’s proposed changes.
Sen. Orrin Hatch, R-Utah, the Republican tax expert in the Senate, said rather than make it more difficult for companies to invert, the U.S. should lower its corporate tax rate to make it more desirable place to set up shop.
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Kent McDill is a staff writer for Millionaire Corner. McDill spent 30 years as a sports writer, working for United Press International and the Daily Herald of Arlington Heights, Ill. From 1988-1999, he covered the Chicago Bulls for the Daily Herald, traveling with them every day through the nine-month season. He also covered the Bulls for UPI from 1985-88, and currently covers the team for www.nba.com. He has written two books on the Bulls, including the new title “100 Things Bulls Fans Should Know And Do Before They Die’, published by Triumph Books. In August 2013, his new book “100 Things Bears Fans Should Know And Do Before They Die” gets published.
In 2008, he resigned from the Herald and became a freelance writer. The Herald hired him to write business features and speeches for the Daily Herald Business Conferences and Awards presentations.
McDill also writes a monthly parenting column for the Herald’s Suburban Parent magazine.
McDill is the father of four children, and an active fan of soccer, Jimmy Buffett and all things Disney.