* Wave of inversion deals had many causes, experts say
* Earnings stripping, foreign profits seen as key
* Motivation for deals not clearly linked to tax rate
* Obama’s budget last week proposed anti-inversion steps
By Kevin Drawbaugh
WASHINGTON, Feb 9 (Reuters) - When a series of big U.S. companies last year moved to reincorporate abroad in inversion deals, some Republican lawmakers and tax policy critics blamed the high U.S. corporate tax rate. Lowering it, they said, would keep companies from fleeing the country.
But a Reuters analysis of the taxes being paid by the six largest companies known to be doing inversions in late 2014 and early 2015 showed that, even before the deals, all were paying below the statutory U.S. federal corporate rate of 35 percent.
Most were well below it. The average effective tax rate for the six companies was 20.3 percent for 2011-2013, Reuters found, using an estimation method reviewed by tax experts that was based on public data for U.S. profits and U.S. taxes.
The Reuters analysis suggests that the surge in inversion transactions may not have had much to do with the statutory corporate income tax. Moreover, it shows Washington’s current debate over business tax reform may be too focused on the statutory rate, neglecting effective rates and the incentives that companies have to shift profits abroad.
The six companies analyzed were Medtronic Inc, Applied Materials Inc, Steris Corp, Mylan Inc , C&J Energy Services Inc and Burger King, which has been renamed Restaurant Brands International Inc.
All six have recently completed or are in the midst of completing inversion-type deals, despite a Treasury Department crackdown in September that slowed inversion deal-making.
Inversions have been around for three decades, but they became more common in recent years. Guided by tax lawyers and accountants, companies have done more than 50 such deals since the 1980s; about half of them just since 2008.
The deals typically involve a U.S. company buying a smaller foreign rival, then taking on its nationality for tax purposes, while many core operations remain in the United States.
The six companies studied have themselves disclosed 2011-2013 effective tax rates averaging 27.8 percent, or 7.5 percentage points higher than the Reuters calculation.
The discrepancy with the Reuters figure is likely because the companies’ figures include not just U.S. federal taxes, but all taxes, including state, local and foreign.
In a project for Reuters, the Institute on Taxation and Economic Policy (ITEP), a tax policy think tank in Washington, looked at the six companies’ data somewhat differently, stripping out certain accounting adjustments, and found an average effective tax rate of 22.2 percent over the period.
Tax inversion deals are mainly driven by efforts to shift profits out of the U.S. and to access overseas earnings at little or no cost in U.S. tax, tax specialists said.
“The issue is much broader than the U.S. corporate tax rate being high,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, a centrist think tank.
To be sure, some other tax experts and activists say the statutory rate is the key, not only to inversions, but to broad U.S. business competitiveness around the world.
“You fix the rates, you fix it all,” said Grover Norquist, a Republican activist and president of Americans for Tax Reform, which advocates for lower taxes and smaller government.
(For related graphic on statutory corporate tax rates around the world, see: link.reuters.com/qak93w)
A close look at of some of the six deals suggests no direct connection with the 35-percent U.S statutory rate.
For instance, Pittsburgh-based pharmaceuticals company Mylan is buying the non-U.S. generic drug business of Chicago’s Abbott Laboratories to create a combined company incorporated in the Netherlands and managed from Pennsylvania.
The Netherlands’ statutory rate is 25 percent. However, Mylan’s global effective tax rates, as disclosed in the company’s annual reports to investors, were 16.2 percent in 2013, 20.0 percent in 2012 and 17.7 percent in 2011.
ITEP pegged Mylan’s U.S.-specific effective tax rate at 20.5 percent on average for those same years, and the Reuters analysis found it to be 19.7 percent.
When Mylan announced the Abbott deal in July 2014, it said it expected it to bring many advantages and “to lower Mylan’s tax rate to approximately 20-21 percent in the first full year, and to the high teens thereafter.” A spokeswoman for Mylan declined to comment and referred questions to past statements.
In another deal, Steris Corp, based near Cleveland, is buying out the UK’s Synergy Health Plc, with the combined company to be managed from Ohio, but incorporated in Britain where the statutory corporate tax rate is 21 percent.
Reuters found a 2011-2013 U.S.-specific average tax rate for Steris of 17.2 percent; ITEP’s calculation came to 16.6 percent.
The company has disclosed global effective tax rates averaging 32.1 percent for the same period. A Steris spokesman said the company expects its effective tax rate beginning in 2016 to be about 25 percent. “This transaction is not being driven by tax rates,” he said.
(For more on the other companies in the study see: Factbox )
The U.S. statutory rate is high. Tack on an average of state and local corporate rates and it’s 39.1 percent. No major country has a higher combined rate. The next highest are Japan at 37 percent and France at 34.4 percent.
But the U.S. tax code is uniquely complex. Big companies use elaborate strategies to exploit loopholes to cut their tax costs, which they say shareholders expect them to do.
The gap between the statutory rate and what companies really pay is hard to measure because their tax returns are, of course, confidential. Financial report data can furnish estimates of effective rates, but there is no standard way to do this. Even when measuring marginal effective tax rates, seen by tax experts as the best test of business investment decisions, it’s hard to know the true U.S. tax burdens of large corporations.
Most lawmakers agree inversions are a problem because they erode the U.S. corporate tax base. Corporations today only provide about 10 percent of U.S. government revenues, down from 30 percent in the 1950s.
In his 2016 budget last week, Democratic President Barack Obama proposed steps to curb inversions and what his administration sees as the incentives for doing them. The Republican-controlled Congress, however, is unlikely to agree with his proposed reforms, which may be dead-on-arrival.
One of Obama’s goals is tightening a rule that makes business interest tax-deductible and helps companies shift profits out of the United States via interest payments on loans from foreign affiliates. This is known as earnings stripping.
Another is ending the “deferral” rule that says companies don’t have to pay income tax on active overseas profits, as long as those profits don’t enter the United States. Companies have about $2.1 trillion in profits abroad. Some came from foreign ventures; some from earnings stripping, tax experts said.
The third target is abusive “transfer pricing.” This involves shifting profits out of the United States to lower-tax countries via cross-border, non-market-based payments among the worldwide affiliates of multinationals.
Cutting the 35-percent statutory rate would not change any of these rules. And no politically realistic U.S. rate cut would be likely to level the playing field with, say, Ireland, which has a 12.5 percent statutory rate and is a popular destination for U.S. companies doing inversions, let alone tax havens such as Bermuda, which charges no corporate income tax at all.
“Until we address earnings stripping and the transfer of intangible rights abroad, we’re always going to have this incentive for foreign companies to combine with U.S. companies and strip the U.S. corporate tax base,” said Rosenthal. (Reporting by Kevin Drawbaugh; Editing by Amy Stevens and Martin Howell)