5 Companies That Have Moved Overseas For Lower Taxes
Globalization has transformed the economies of both developed and developing countries alike, creating a competitive landscape that puts political pressure on governments across the world.
To remain relevant today, countries must adopt policies that will attract and retain jobs. This fact has been underscored in harsh terms by the companies that have fled the United States in search of greener pastures.
Oftentimes, these relocations are driven by lower taxes, fewer onerous regulations and cheaper labor.
According to the OECD, the U.S. corporate tax rate is the highest in the world. Furthermore, U.S. corporations have an estimated $1.95 trillion in retained earnings parked overseas, which cannot be repatriated without incurring substantial taxes.
This tax burden can be avoided if the corporations can become foreign. As a result, a significant number of corporations have moved their headquarters overseas using a process called "inversion," whereby a foreign competitor is acquired and the combined company is domiciled in the lower-tax jurisdiction.
These companies have become known as “corporate deserters” and have created a political firestorm in the United States. Politicians have tried using a combination of tough talk along with appeals to “economic patriotism” in order to stem the tide.
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Since 1983, a total of 76 companies have shifted their corporate headquarters away from the U.S., including 47 over the last decade. Despite the negative headlines that such moves generate, economic realities will likely continue to motivate corporations to relocate overseas in search of sustainable competitive advantages.
Here's a closer look at five companies that have bid farewell to the United States:
AbbVie (NYSE: ABBV) -- Like many so-called “corporate deserters,” AbbVie operates in the pharmaceutical industry. In many cases, instances of drug companies moving overseas can seem less egregious because they often generate 50 percent or more of their sales internationally.
AbbVie was formerly based in North Chicago, Illinois, but is planning to move its legal residence to the U.K. after acquiring Shire PLC in a $55 billion deal. AbbVie itself began trading as an independent company on the New York Stock Exchange after being spun-off from Abbott Laboratories (NYSE: ABT) in 2012.
Today, AbbVie has a market-cap of more than $83 billion, with the stock rising around 59 percent since December 2012. By relocating, the company is expected to be able to lower its tax rate from 22 percent to 13 percent in 2016.
Medtronic (NYSE: MDT) -- This Minneapolis-based medical device manufacturer recently announced that it is acquiring Covidien (NYSE: COV) in a $42.9 billion deal. As a result of the merger, the combined company is planning to move its corporate headquarters to Ireland in order to lower its tax burden. The move will likely not be without negative consequences, however, as there is a good chance that the company will be kicked off the Fortune 500.
Among the reasons that Medtronic has given for the planned change in its headquarters is the ability to deploy its foreign profits in the U.S. without having to pay substantially higher U.S. taxes. CEO Omar Ishrak said that the move will allow the company to commit $10 billion more, “above and beyond Medtronic's and Covidien's current plans,” to U.S. technology investments.
Although the U.S. statutory corporate tax rate is 35 percent, the highest in the world, Medtronic's effective U.S. rate is around 18 percent. This compares to Ireland's statutory rate of 12.5 percent.
Although Medtronic's acquisition of Covidien and the combined company's subsequent relocation may actually lead to more investment in the U.S., critics fear that it could encourage more companies to execute similar tax-avoidance maneuvers in the near future.
Chiquita Brands International (NYSE: CQB) -- In yet another example of corporate inversion, Chiquita Brands International and Fyffes announced a merger in March 2014. The merger will take the form of a stock-for-stock transaction with former Chiquita shareholders owning around 50.7 percent of the combined company and Fyffes shareholders getting a 49.3 percent stake. The new company will be domiciled in Ireland, resulting in substantial tax savings.
Currently, Chiquita is headquartered in Charlotte, North Carolina. The announced merger and relocation plans may create a liability for the company, which was granted significant incentives to establish its corporate base in North Carolina.
The incentives, which amount to around $22 million, require that the company operate its “global headquarters” in Charlotte. The contract also stipulates that if Chiquita relocates its headquarters away from Charlotte, it must repay the incentives that it has already received -- around $1.5 million.
Perrigo (NYSE: PRGO) -- This drugmaker acquired Ireland-based pharmaceutical company Elan in a deal announced in July 2013 and promptly moved its global headquarters to Dublin.
The transaction allows Perrigo, formerly based in Allegan, Michigan, to be taxed at Ireland's 12.5 percent rate. At the time of the deal, Perrigo said that it will be able to save around $150 million in recurring after-tax annual operating expenses and tax savings.
The transaction was also completed with an eye toward more international acquisitions. “Through this transaction, Perrigo establishes a diversified platform for further international expansion,” Chairman and Chief Executive Officer Joseph C. Papa said in the statement. “A lower tax rate could put it in a much stronger position to grow inorganically going forward,” Ami Fadia, a UBS AG analyst in New York, said in a note to investors at the time.
Applied Materials (NASDAQ: AMAT) -- This company's corporate inversion, which has yet to be finalized, was announced in September 2013 as a merger of Applied Materials and Tokyo Electron. Rather than domicile the combined company in either California, home to Applied Materials, or Japan, where Tokyo Electron is headquartered, the new company will be based in the Netherlands.
The move is expected to result in an effective tax rate of 17 percent compared to a previous rate of 22 percent. In dollar terms, the 5 percentage point decline could save the new company $100 million per year. Under the terms of the transaction, Applied Materials' shareholders will own 68 percent of the new company.
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