America's biggest companies fight like tigers for surprisingly tiny advantages. Grabbing as little as a single extra percent of market share can mean millions in new revenue, especially in popular categories like soft drinks or laundry detergent.
The same is true when it comes to taxes. A chief financial officer who cuts his company's tax rate by a percent or two is a hero — and while his name may not make headlines, his paycheck will show it. The Fortune 500 compete for tax planning talent like baseball teams compete for starting pitchers. General Electric is a great example — from 2002 through 2011, it earned billions in profit and paid an average tax rate of just 1.8%. No wonder its tax department has been called "the world's best tax law firm."
Right now, the coolest kids in corporate America's tax departments are all talking about "tax inversions." The strategy involves buying a foreign company headquartered somewhere with lower taxes, then moving their "tax domicile" to the new country while leaving their core business here. Nine U.S. companies have taken the plunge in 2014, and a dozen more are currently weighing it. Take Medtronic, for example. The Minnesota-based pacemaker manufacturer was groaning under a combined 39.1% federal and state tax rate. That's enough to give any CFO a stroke. So what do the tax doctors prescribe? Merge with Covidien, in Ireland. Take advantage of the Emerald Isle's 12.5% rate, and party like it's 1999. The move could save as much as $4.2 billion in U.S. taxes.
If you think this sounds like the sort of move that would upset our friends at the IRS, you're right. (Google "tax inversion + weasel" and you'll get 4,450,000 results.) Last month, President Obama condemned it as "gaming the system," and urged Congress to slam the doors shut, saying "stopping companies from renouncing their citizenship just to get out of paying their fair share of taxes is something that "cannot wait.” Of course, inversions have their champions, too. Defenders point out they're perfectly legal under Internal Revenue Code Section 7874. They argue that the tax savings created by inversions flow through to customers, employees, and shareholders in the form of lower prices, higher wages, and higher profits. And they assert that the deals will help American companies compete against rivals in lower-taxed jurisdictions, protecting jobs and wages.
But not everyone is jumping on the tax inversion bandwagon. This summer, Walgreens announced they would be completing their acquisition of Alliance Boots, Europe's largest pharmacy. Walgreens had contemplated using the deal to move their tax headquarters to Switzerland, but ultimately decided to pass. Since then, the company's stock has dropped 15%. So . . . a mistake? Well, moving could have saved a bundle — as much as $4 billion over the next five years. But it also could have backfired, big time. Executives worried it could spark a decade-long fight with the IRS, chase customers away, and even jeopardize the millions of dollars in federal revenue that Walgreens rakes in from Medicare and Medicaid. Senator Dick Durbin reported he was thrilled that "the corner of happy and healthy" would stay "right here in Illinois."
What do you think? Are the folks who take advantage of tax inversions really "gaming the system," as President Obama has said? Or are they just playing the hand they're dealt, protecting themselves as best they can against the aces up everyone else's sleeves? Whichever you think, remember that we're here to help you play the cards you're dealt. So call us with your questions, and let us help you pay the least tax you can!
Let's Talk! For a deeper conversation on our services, or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday for a no cost consultation, or drop me a note.
Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. As a trusted senior advisor and counselor working closely with Entrepreneurs, Professionals and Select Individuals, Mr. Hoffman provides counsel to his clients who are navigating through the complexity of today's business, tax, and accounting challenges.
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