More U.S. companies are reincorporating overseas, thereby reducing their corporate income tax bill and shifting to other taxpayers more of the burden of funding the federal government.
The latest example of this comes from locally based pharmaceutical giant Mylan Inc., which announced July 14 its intent to acquire a major chunk of Abbot Laboratories’ generic-drug business outside the United States. The Cecil-headquartered company would reincorporate in the Netherlands, which would lower the amount of corporate taxes it pays.
The action, known as an inversion, is an increasingly common tactic for U.S. companies. Heather Bresch, Mylan’s chief executive, said the merger was a result of strategic interests in Europe, not the pursuit of a lower tax rate.
Her company has been vigorously pursuing an overseas acquisition and failed in a takeover attempt of Swedish drug maker Meda in April. Chicago-based Abbot will spin off its overseas generic drug unit into a new business, Mylan NV, which will become the parent company of Mylan. Abbot will own 21 percent of the new parent company, just above the statutory minimum of 20 percent.
While large companies often cite the corporate tax rate of 35 percent as the motivating factor for jumping overseas, not all of them pay that amount, given the tax credits and allowances they receive. Mylan paid an effective federal tax rate of 16.2 percent in 2013, according to its securities filing. It could substantially reduce its tax bill through inversion, which has been used by other large pharmaceutical companies.
Spurred by these potential savings, the health care sector has been on a deal-making binge, with global acquisitions amounting to $332.8 billion over the past year. Researchers at the Joint Commission on Taxation estimate that tax inversions will cost the government $19.4 billion over the next decade. Prominent American companies such as Michael Kors and Garmin have already used them, with giants like Pfizer and Walgreen pursuing the strategy. Congress must act to correct this loophole in the tax code.
Mylan benefits from contracts worth $3 billion with the Department of Veteran Affairs, yet this transaction will enable it to pay less in taxes to that same U.S. government. Companies that have built their success in part on business from the public should be willing to pay their fair share to support the public treasury.