Mylan Merger Highlights New Corporate Tax Strategy: Spinversions

July 15, 2014

The developed world’s most punitive corporate tax regime (ours) continues to spawn new ways to escape it. Corporate inversions, in which the U.S. company buys a smaller foreign company and relocates abroad, have become increasingly common. Over 40 companies have left the U.S. in this way in just the last 5 years, according to the Congressional Research Service. Most companies are leaving for countries with corporate tax rates that are about half what they are in the U.S., and also countries that limit corporate taxation to profits earned within their borders (a territorial tax system). Many countries in Europe fit the bill, including the U.K., Ireland, the Netherlands, and Switzerland.

Politicians have proposed new rules to make inversions more difficult, essentially by limiting them to mergers among equals, but the latest technique appears to be one step ahead of them. Behold the “spinversion”, as described by Tax Analysts (subscription):

Generic drugmaker Mylan Inc. announced July 14 that it will purchase Abbott Laboratories' non-U.S. generic drug unit in an all-stock transaction worth $5.3 billion and then reincorporate as a Dutch company to cut its global effective tax rate.

Under the agreement, Abbott will carve out and transfer its non-U.S. developed markets, specialty, and branded generic business assets to a new public company called New Mylan, organized in the Netherlands, according to a Mylan news release. Following the asset transfer, Mylan will merge with a wholly owned subsidiary of New Mylan, and a new public company called Mylan NV will be created; New Mylan will then be named the parent company. Mylan's existing executive team will run Mylan NV from its current headquarters in Pittsburgh. Abbott is based in Abbott Park, Illinois.

Also, as a result of the deal, Mylan's global effective tax rate is expected to fall from 25 percent to 20 to 21 percent in the first full year and will drop to the "high teens" in subsequent years, the release said.

The Mylan-Abbott deal is the latest in a wave of corporate inversions involving U.S. firms merging with foreign companies to reincorporate in foreign jurisdictions to gain a tax advantage. However, Mylan is reportedly one of the first companies to engage in a so-called spinversion, an inversion involving the purchase of a business unit instead of an entire company.

Spinversions allow any company of any size to leave the U.S., by spinning off and recombining business units to fit whatever Congress and the IRS deem an allowable inversion. It takes time and money (all tremendously wasteful for the overall economy) but companies are willing to pursue these strategies if they can cut their effective tax rates sufficiently.

The only real solution is to cut taxes on U.S.-based corporations to match our competitors, i.e. cut the corporate tax rate to somewhere close to the average among developed countries (25 percent) and limit it to profits earned within U.S. borders (a territorial system).

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