Why Danaher Corporation is not looking to invert

A flurry of deals has/have been proposed in the past few months which have sought to restructure through an inversion by merger or acquisition, with US pharmaceuticals in particular looking to reincorporate abroad. The latest examples include the $43 billion Medtronic-Covidien deal, AbbVie’s $31 billion bid, now successful, for Shire, the Salix-Cosmo merger and Mylan’s $5.3 billion stock purchase of Abbott Laboratories’ generic drugs business, not to mention Pfizer’s failed bid to acquire UK-based AstraZeneca (which could yet be revived).

The popularity of the restructuring option is undeniable, with the Congressional Research Service confirming that 47 companies has used the technique in the past decade, compared with 29 in the 20 years before that. And the volume of recent examples is causing shareholders of other companies (particularly rivals in the pharmaceuticals sector) to pressure their tax departments into looking at the option.

But Ditkoff, senior vice president, tax and finance, at Danaher Corporation, is not feeling this pressure. This is despite a Goldman Sachs report which attempts to gauge the prospects for further inversions in the US healthcare sector by analysing 2013 10-k filings to assess the likelihood of future inversions based on the amount of cash companies have that is held outside of the US, and their effective tax rates.

Goldman does not make predictions or recommendations, but suggests that some US healthcare companies may benefit from tax inversions, including Pfizer, Stryker and Gilead Sciences. This is largely based on assumptions that unlocking offshore cash and lowering the effective tax rates are the two key justifications (aside from non-tax reasons) for looking to invert.

The Goldman report suggested Danaher has 61% of its cash outside of the US.

“Let me put one thing to rest right now,” responded Ditkoff. “Danaher has zero cash ‘trapped’ offshore. We are a worldwide manufacturing company with as many or more investment opportunities in developing markets as we have in the US.”

He said there are different factors at play for different types of company, which explains why most inversions being undertaken involve companies in the pharmaceuticals sector.

“Our situation is different from that of a drug company or a soft drink company or a computer company that stuffs powder into pills or mixes soft drink concentrate or assembles components manufactured by others in some foreign tax haven,” said Ditkoff. “Such companies have no real use for the billions of dollars of profits they claim to have earned offshore, which is why those profits sit in bank accounts in Bermuda waiting for Congress to enact another repatriation holiday.”

As the Goldman report points out, inverting abroad usually has two tax-related motivations: firstly to make use of cash that is trapped overseas and which cannot be repatriated without incurring a tax liability, and secondly to mitigate the company’s effective tax rate. But Ditkoff said Danaher does not need to reincorporate overseas to lower its effective tax rate.

“Since our profits come from world-class manufacturing or products that meet customer needs, rather than foreign exploitation of US-owned patents and trademarks, we can generate our manufacturing products wherever we choose,” he said. “Right now, we sell more US manufactured products overseas than foreign manufactured products in the US, but that could change in the future. Where we choose to develop and manufacture new products is based on costs, product expertise, proximity to customers and many other factors that have nothing to do with tax. But anything we manufacture in the US could just as easily be manufactured somewhere else.”

“So Congress can do whatever they want with inversions as far as I’m concerned.”

However, he still recommends lawmakers try a different approach from what is now being considered by some Congressmen including Sander Levin and his brother Carl, who have been working on anti-inversion legislation which would raise the foreign company ownership requirement threshold from 20% to 50%.

“But legislation to restrict future inversions is like locking the barn door after the horse has escaped. Why not amend Section 163(j) [of the Internal Revenue Code] to reduce the amount of US income that can be sheltered with interest payments to foreign tax shelters that are not subject to US tax?” asks Ditkoff.

Such a move would have an impact on past and present inverters.

“And they would really have nothing to complain about, since most of them claimed that they were inverting to protect their foreign profits from US tax, rather than to cut the taxes on their US profits in half,” said Ditkoff.

Ditkoff reiterated a point he and other US taxpayers have made before about tax policy changes focusing on job creation.

“US tax policy ought to encourage job-creating US manufacturing. Walmart will build and operate stores in the US regardless of our corporate tax rate. But manufacturers can vote with their feet. They don’t need to change their place of incorporation by inverting.”