What’s the proper way to tax personal saving and investment? It’s a great question, and under current tax law, we have lots of different answers! Specifically, we have four of them, which I’ll get to in a moment. But...
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Self Help Tax Reform: A U.S. Firm Moves to Ireland, How Will Washington Respond?
Earlier this month, the Massachusetts-based drug firm Alkermes announced that it was buying the Irish pharmaceutical maker Elan Drug Technologies in a deal valued at roughly $960 million according to press reports.
This is not your typical story of a U.S. firm acquiring a foreign company and running the company from the U.S. headquarters. What makes this deal most intriguing - and relevant to the current debate over reforming the U.S. corporate tax code - is that the two firms will be merged under a new holding company incorporated in Ireland; meaning, Alkermes the U.S. firm will become Alkermes plc the Irish firm.
As a functional matter, the move will have little impact on the company's operations. Management will have to split its time between the new headquarters in Dublin and the current headquarters in Waltham, Massachusetts, but the company's 600 employees will be largely unaffected.
The big change will be in the company's finances as it stands to save millions in taxes by being an Irish firm rather than a U.S. firm. Not only will the company benefit from Ireland's 12.5 percent corporate tax rate, it will shield all of its foreign earnings from the U.S.'s worldwide tax system and our high 35 percent corporate tax rate. Indeed, The Street reported that "Alkermes loses money today but will turn cash-flow positive and profitable with the acquisition of the EDT business."
While the tax side of this deal has been ignored by the press, it provides yet another example of how uncompetitive and unfriendly to business the U.S. corporate tax system is. But if history is any guide, lawmakers will take the wrong message from this event. Ten years ago, after a spate of very high-profile "inversions" in which U.S. firms reincorporated themselves as Bermuda companies in order to reduce their tax bills, lawmakers chose to ignore the underlying problems with our corporate tax system and instead enacted legislation that effectively outlawed such corporate relocations.
It will be interesting to see if tiny Alkermes (the combined firm expects annual revenues of $450 million) will start a trend of companies that self-help their way toward tax reform by purchasing a foreign firm and then reincorporate in a low-tax country. The more typical way in which U.S. firms have shielded their foreign profits from our worldwide system has been by being purchased by a foreign firm, as in InBev's purchase of Anheuser-Busch or the pending purchase of the New York Stock Exchange by the German company Deutsche Börse AG.
But I can't end without pointing out the irony in the fact that Alkermes is based in the home state of Senator John Kerry whose 2004 presidential campaign was based on punishing so-called Benedict Arnold companies. I wonder what he thinks of this case in his own back yard. Because what will be good for the company's workers and shareholders will be bad for the taxman. He will have to choose which he values most.
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