While issues of tax fairness and tax morality cannot be said to
have taken off as spectacularly as in other parts of the world,
there have been a number of sparks that have reignited these
themes in the US. Chief among these in 2014 was
the restructuring method known as tax inversion.
pharmaceuticals is a new entry this year
A typical US inversion involves the acquisition of, or
merger with, an overseas company in a country with a corporate
tax rate lower than the US's and, post-transaction, moving the
newly-incorporated company's headquarters to the overseas
jurisdiction. Of course, there are business expansion motives
for such a move, but the primary tax benefit for US companies
in pursuing this strategy is that by moving the new company's
headquarters, they can escape the punitive US tax code, which
levies a high tax rate and operates a worldwide system of
With cash trapped offshore by the US system, highly mobile
US pharmaceutical companies have looked at the inversion option
during 2014 as a way of utilising such cash for acquisitions
without getting hit with tax on repatriation.
"When earnings are trapped overseas, it's much more
efficient to build a facility overseas," Susan Kilby,
chairwoman of British drugmaker Shire explained to
Between 1983 and 2004 there were 29 inversions out of the
US, but in the decade following almost 50 companies have
restructured using the method.
The frenzy this tax transactional technique has caused in
Washington this year has been phenomenal.
Pharmaceutical companies such as AbbVie, Medtronic, Mylan
and Pfizer have all considered inverting in the past 12 months.
These considerations led to
a fierce backlash from certain figures on Capitol Hill, and
political rhetoric has skewed the debate dramatically.
The inversions "epidemic" or "virus" (if you listen to Ron
Wyden, US Senate Finance Committee chairman) is actually far
from that. If you consider that there have been roughly 70
instances of US companies inverting in a 30-year period, some
quick maths and a basic understanding of the word "epidemic"
tells us the description is tenuous at best. To reinforce the
point, two of the headline-grabbing companies listed above
Pfizer – did not even complete an inversion.
However, vocal representatives of these pharmaceuticals,
such as Mylan CEO Heather Bresch and AbbVie president Rick
Gonzalez – much like
Apple's Tim Cook and Google's Eric Schmidt, who earned
themselves a place in last year's list for similar reasons
– defended their companies' decisions and called on
legislators to reform the US tax code if they did not like
"When I hear things like "unpatriotic," I just chalk it up
to a lot of political rhetoric. The reality is the move we are
making will maintain the jobs that we not only have here in the
US but allow us to continue to expand," Bresch
told Fortune, adding that the other option "is
being acquired by a foreign entity that is going to use the US
as a synergy. That is lost on most."
A statement from AbbVie after
US Treasury Secretary Jack Lew put together the Treasury
Notice restricting the benefits of inverting said the notice
"reinterpreted longstanding tax principles in a uniquely
selective manner designed specifically to destroy the financial
benefits of these types of transactions".
Gonzalez used his announcement of the
AbbVie-Shire deal termination to call for broader tax
reform, criticising the Obama administration in the process for
"creating an environment of risk and uncertainty".
"The unprecedented unilateral action by the US Department of
the Treasury may have destroyed the value in this transaction,
but it does not resolve a critical issue facing American
businesses today," said Gonzalez. "The US tax code is outdated
and is putting global US-based companies at a disadvantage to
foreign competitors in an area of critical importance,
specifically investing in the United States. Comprehensive tax
reform is essential to create competitiveness and to stimulate
investment in the economy."
Bresch also tried to see the positives amid the furore.
"If all of this
lights a fire on how dysfunctional and uncompetitive our
system is then it was well worth it because it needs to be
fixed," she said.
Leading business figures such as Bresch and Gonzalez must
continue to maintain a strong pro-tax reform stance throughout
2015 and beyond to ensure their voices are part of discussions
influence the shape of the US tax code for decades to
If the threat of US multinationals relocating overseas is
what it takes to persuade Capitol Hill to find a bipartisan
tax reform solution, the inversions drama will have served
a valuable purpose, vindicating the inclusion of US
pharmaceutical inverters on this list.