How many of us have heard a business conversation in which the speaker inadvertently substitutes the word “country” for “company,” or vice versa? These days, it’s a bit of a Freudian slip.
Waltham-based Alkermes bought Ireland-based Elan Technologies in 2011 and relocated its headquarters overseas in search of future tax benefits. There’s the $42.9 billion acquisition of Covidien PLC by Minneapolis-based Medtronic. Most of Covidien’s operations are based in Mansfield, but its headquarters are in Dublin. Shire PLC, headquartered in Dublin with a campus in Lexington, has just accepted a $55 billion bid from Abbvie Inc. Shire reportedly has 500 people in the U.K. out of 5,000 employees.
Tax inversion, an acquisition that establishes an offshore corporate headquarters address in search of lower corporate taxes, decouples a company’s base of business, including its operational headquarters, from its legal headquarters. The practice has been going on for decades, but really gathered steam in 2004. Since then, 47 inversions have occurred, many of them in the life-sciences.
Unlike a merger, in which the acquirer usually becomes the corporate center and is accompanied by a restructuring of the combined workforces, a tax inversion leaves the (usually) stateside operations more or less intact.
Tax-inverting companies aren’t taxed a repatriation fee on foreign earnings. However, shareholders don’t share that tax break. If the company increases dividend payments, their taxes go up, and their stock is treated as if they’d sold it, so they get socked with a capital-gains bill.
Offshore headquarters havens include Ireland, the Netherlands, Switzerland and Canada, which don’t tax U.S. companies’ foreign profits.
We’ll focus on Ireland. Its economic boom, beginning in the 1980s, and subsequent 2007 bust, coincided with the U.S. economic picture. Ireland’s tax structure is and was overly reliant on property taxes, value-added taxes and income tax – making it overly dependent on individuals and the housing market. Meanwhile, corporate rates were and are lower than those in the U.S. and most of the rest of the European Union.
If this sounds familiar, it should. Research from the Tax Policy Center, Urban Institute and Brookings Institution shows that in 1950, corporations supplied a third of federal tax revenues, while 42 percent came from individual income taxes and 9 percent from payroll taxes. By 2010, corporate taxes made up only 9 percent, individual income tax was steady at 42 percent and payroll taxes had jumped to 40 percent of the total. The big picture: less corporate investment into the country that continues to serve as the basis of their real-life operations, while the people who supply the value pay more.
Tax-inversion advocates say inversions are legal (true), and that the practice keeps companies more globally competitive. But the larger question is how tax-saving companies would choose how to put those savings to work. Will they invest it in workforce development here or abroad? Or will they use it for dividend payments and stock buybacks, or keep it on their balance sheets as profit? And if so, how long will the people providing the intellectual-property productivity be motivated to keep doing so? That’s when we’ll really see the disconnect between “country” and “company.”
