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Pharmaceutical giant Pfizer Inc. will save nearly $35 billion in U.S. taxes over a decade through its merger with Irish drugmaker Allergan PLC because it will avoid paying tax on $148 billion in earnings stashed offshore, according to a report by Americans for Tax Fairness released on Thursday.
The main reason [for inversions] is that the corporation tax regime in the US is the most demanding among developed economies. American firms are taxed on their domestic earnings at up to 39%, and also on income repatriated from foreign subsidiaries.
For example, a US firm with a subsidiary based in Dublin pays the 12.5% headline rate of corporation tax in Ireland. The US taxman then levies a 26.5% rate on earnings from that subsidiary that flow back to America. That means the company’s overall tax bill has effectively been topped up to the domestic rate of up to 39%.
Most other countries impose a much lower rate than the US on repatriated earnings. If a company can shift its country of incorporation, the US taxman loses the right to take a slice of income from foreign subsidiaries.
This system has led American firms to stash an estimated $2 trillion overseas, rather than repatriate the money. It is also seen as a key motivation behind most tax inversions.
In a November 2014 notice, the Treasury said it was going to issue regulations to prevent hopscotch loans, but the rules would apply only to inverted companies whose former shareholders own at least 60 percent of the new foreign parent. The Pfizer-Allergan deal would not run afoul of the rules because it is structured such that the former Pfizer shareholders retain only 56 percent ownership of the new company, ATF said.
“The rule’s prohibition on ‘hopscotch loans,’ which are used by inverted corporations to dodge U.S. taxes owed on offshore profits at the time of the inversion, should be applied to all foreign acquisitions of U.S. corporations,” ATF said.
Pfizer said in a statement that the inversion deal "is not structured to move jobs out of the United States, where we conduct the majority of our research." The merger with Allergan "will create a global, R&D-focused company," the statement said.
President Obama has called such companies “corporate deserters” who are being “unpatriotic” by seeking to reduce their contribution to US coffers.
For the most part, though, US politicians have been happy enough for companies to buy foreign firms when the deal makes obvious sense, even if the end result is a lower tax bill. What many object to is an artificial takeover designed purely to avoid tax.
This was the take of the US treasury secretary, Jack Lew, in an editorial written for the Washington Post: “There is nothing wrong with cross-border merger activity; our economy is stronger for our investment overseas and for foreign investment in the United States. But these activities should be based on economic efficiency, not tax savings.”
Republicans call them the inevitable consequence of a flawed tax system, and say the only solution is a full revamp of the tax code, including lowering the corporate rate and limiting taxes on foreign profits.
Although some Democrats agree on the broad outlines of a corporate-tax revision — Obama’s 2016 budget calls for lowering domestic and foreign rates — the parties disagree on so many other things that there’s little chance that a big tax bill will pass Congress any time soon.
originally posted by: Bluntone22
So how does this tax thing work anyhow?
Toyota sells loads of cars in america. Do they pay income tax on those sales?
Pfizer makes and sells drugs overseas and in america. Do they pay tax on American sales?
John North, the vice president of finance for Ashland-based Lithia Motors, said the auto retailer would see almost all its profits from Oregon stores wiped out under a tax measure headed toward the November 2016 ballot.
"That's not really sustainable," said North, adding that Lithia, one of the state's three Fortune 500 companies, might reduce its presence in Oregon if the measure passes.
"Everything is on the table," he said. "We may have to change our headquarters."
originally posted by: onequestion
It's out of our ability to control it.
originally posted by: alldaylong
Why are Americans complaining about tax avoidance ?
The U.S. was founded on that very issue. What goes around comes around.
originally posted by: xuenchen
Well all we keep hearing about is this "Global" trade etc. etc.
Makes sense for companies to "relocate" as long as the U.S. is way behind in the tax structures.
Not to mention all the recent "talk" of higher taxes to fund social programs that are already riddled with corruption on multiple levels.