Increasingly, U.S. corporations such as Burger King Worldwide Inc. (NYSE: BKW), AbbVie Inc. (NYSE: ABBV) and Pfizer Inc. (NYSE: PFE) are using acquisitions to move their headquarters to countries with lower tax rates. As the popularity of the practice grows among public companies, middle-market companies are also considering the tactic. But the strategy is coming under fire from consumers and politicians.
Tax inversions have been a major driver in cross-border dealmaking, accounting for 66 percent of proposed outbound deals in 2014, up from just 1 percent in 2011, according to Thomson Reuters.
“Certainly, this year, we’ve seen more than ever,” says Frank Aquila of law firm Sullivan & Cromwell, adding that corporate acquirers see it as a way around the U.S. corporate tax rate of 35 percent. Switzerland, for example, boasts 8.5 percent.
Moving abroad is often considered in the multi-billion dollar market, but “inversions make sense conceptually for any company, regardless of size,” says Robert Profusek, global head of M&A at law firm Jones Day. “I do see inversions continuing as a part of the dealmaker’s tool kit, with a very low probability of legislative action to preempt them.”
Meanwhile, President Barack Obama has called for a new “economic patriotism” and denounced companies engaged in tax-inversion as “corporate deserters who denounce their citizenship to shield profits.”
Pressure from politicians has led some companies to back away from the strategy. Walgreen Co. (NYSE: WAG) had considered “re-domiciling” to Switzerland after it paid $15 billion in stock for Alliance Boots, a Swiss company that runs pharmacy stores in Europe, but opted to remain in Deerfield, Illinois, instead.
“The populace has a great voice in the media,” says Michael Gibbons, managing director of Chicago investment bank Brown Gibbons Lang & Co. “If Walgreens became the poster child for the bad corporate guy,’ you might go to a CVS instead.”
Other U.S. companies have stayed the course. Miami-based Burger King agreed to buy Tim Hortons Inc. and move its headquarters to Canada, which has a corporate tax of 26.5 percent. Chicago-based AbbVie’s $54 billion acquisition of Shire plc (LON: SHP) in July will allow the buyer to reincorporate in Britain, reducing the company’s effective tax rate to 13 percent by 2016 from 22.6 percent in 2013. New York-based Pfizer, earlier this year, would have saved billions in U.S. taxes in a merger with London-based AstraZeneca (LON: AZN), but the deal collapsed.
Sen. Chuck Schumer (D-N.Y.) has outlined a proposal to make the economics of moving a headquarters overseas more difficult. And U.S. Treasury Department officials alongside Secretary Jacob Lew are urging Congress to take action quickly, as a wave of potential inversion deals are expected over the coming months.