“Tax Inversions” are in the news in a big way. Because the corporate tax rate in the US is the highest in the world, many companies have purchased smaller companies overseas where tax jurisdictions are less onerous and assuming new legal addresses abroad. Bloomberg reports that there have been 41 US companies which have reincorporated in low-tax countries since 1982, including 11 since 2012. There are several transactions in play right now.
A large medical device company has successfully bought another firm located in Ireland. A well-known pharmaceutical company has been soliciting, so far unsuccessfully, a company in the U.K. Significantly lower corporate tax rates and the ability to deploy overseas cash without repatriating it, making it subject to US taxes, make these deals very attractive. Most countries only tax domestic profits. The US is one of the few that taxes its companies on world-wide income it brings home. It is particularly understandable why companies that rely on intellectual property, such as patents, would find it attractive to relocate those patents to a favorable tax jurisdiction where the income is taxed at a lower rate.
Interestingly, the Japanese Prime Minister has just announced a package of economic reforms designed to energize corporate earnings. One of the principal economic reforms will be to reduce the corporate income tax to below 30% over the next few years.
Certainly, losing US corporations to foreign locations does not sit well with anyone in Washington. Solutions to the problem vary, of course. Some would like to tighten the rules on inversions. Others see fundamental problems with our tax system and are recommending broad tax reform. However, it is unlikely that we will see anything done this year to curb corporate interest in seeking ways to improve earnings by significantly reducing their taxes. In the meantime, we should expect to see corporations continue to look for overseas investment opportunities that make sense strategically and offer attractive tax benefits.
John Hess 
Falgun Jariwala 
Managing Principal Managing Director
jhess@nsinvestors.com fjariwala@nsinvestors.com
www.nsinvestors.com www.nsinvestors.com
- The views expressed are provided for information only and are not to be used or considered as an offer or solicitation to buy or sell securities or investment products. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you consult your financial advisor.
- Investing involves risk, including loss of principal. International investing involves special risks such as currency fluctuations and political instability and may not be suitable for all investors.
- The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.