Regan: U.S. tax code spurs loveless foreign corporate ‘marriages’

“You’ve seen a recurring headline at the top of the business section this year: ‘ABC Corporation buys XYZ Inc. in multi-billion merger.’ When one company buys another, it’s typically done because there’s a fundamental belief that the sum is greater than the parts (Apple for Dr. Dre’s Beats Music, for example),” Trish Regan, anchor and editor-at-large for Bloomberg TV, writes for USA Today. “Or a belief that the target has a product the acquirer desperately needs (Valeant for Allergan, the maker of Botox). Or, the merger simply takes competition off the market (Comcast for Time Warner Cable – the No. 1 and No. 2 cable companies in America). In sum, there are lots of good reasons for two companies to get married.”

“But there’s a new reason corporations are merging – and it’s more akin to a mail-order bride arrangement. In these loveless transactions, American companies are buying foreign counterparts to get a new passport – and enjoy the lower corporate taxes that come along with it,” Regan writes. “The most recent example of a so-called ‘inversion transaction’ is Pfizer’s $106 billion battle to take over Britain’s AstraZeneca. Pfizer, a 165-year-old blue chip American healthcare company with its headquarters in New York City, plans to reincorporate in the U.K. as part of its AstraZeneca acquisition. Pfizer is voluntarily electing to give up its citizenship as a part of this deal — and the U.S. tax code is to blame.”

“So, why are American multinationals acting like desperate young women in dead-end economies? Because U.S. firms are at a serious disadvantage compared to foreign competitors operating under more favorable tax regimes. The U.S. tax rate for corporate profits is 35%, among the highest in the world. And, that tax applies to profits earned anywhere — regardless of the local rat,” Regan writes. “There are other ways American corporations can avoid paying taxes at the border, besides foreign M&A. They can simply keep the money overseas. In tax lawyer speak, as long as income earned offshore is “intended to be indefinitely invested” in operations outside the United States, companies don’t need to pay U.S. income tax… Apple is one of the biggest implementers of this offshore tax strategy and its methods are now on full display thanks to its recent stock buyback announcement. Apple is actually borrowing money to fund its $90 billion buyback even though it has more than $150 billion in cash available – just not on American soil. Most of that money ($132 billion) is held offshore and it just makes more financial sense to issue debt at 3% a year (and get a tax savings on that expense, mind you) than to bring the money home and pay Uncle Sam 35%”

Read more in the full article here.

MacDailyNews Take: The U.S. corporate tax rate is way too high. Obviously.

Under the current U.S. corporate tax system, it would be very expensive to repatriate that cash. Unfortunately, the tax code has not kept up with the digital age. The tax system handicaps American corporations in relation to our foreign competitors who don’t have such constraints on the free flow of capital… Apple has always believed in the simple, not the complex. You can see it in our products and the way we conduct ourselves. It is in this spirit that we recommend a dramatic simplification of the corporate tax code. This reform should be revenue neutral, eliminate all corporate tax expenditures, lower corporate income tax rates and implement a reasonable tax on foreign earnings that allows the free flow of capital back to the U.S. We make this recommendation with our eyes wide open, realizing this would likely increase Apple’s U.S. taxes. But we strongly believe such comprehensive reform would be fair to all taxpayers, would keep America globally competitive and would promote U.S. economic growth. – Apple CEO Tim Cook, May 21, 2013

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