4 thoughts on “Tax avoidance: The Irish inversion”

  1. This is going to end badly for us.
    It’s certainly not a financial threat of the black swan variety . . . but rather a greyer toned big duck. And it’s only a matter of time before it lands in our pond.

  2. In a issue related to the US tax code, Ebay’s 8-K SEC filing made yesterday for Q1 2014 has some interesting outcomes. The form is availble here but all you really need is:

    Non-GAAP earnings increased 11%, to $899 million or $0.70 per diluted share, over the prior year, driven by strong top line growth. A first quarter GAAP loss of ($2.3) billion or ($1.82) per diluted share, was due to a discrete tax charge of approximately $3.0 billion.

    From the income statement it can be seen that Ebay’s effective tax rate for Q1 2014 was:

    ($3,199mn/$873mn) x 100 = 366%

    The discrete tax charge was primarily because Ebay not intends to repatriate to the US around $9 billion of profits that were previously held ‘offshore’. Ebay probably used versions of the ‘double-irish’ tax strategy to trigger a deferral of the US corporate income tax liability using subsidiaries in Luxembourg and/or Switzerland.

    Tax payments such as this €3 billion will never appear in US BEA data on direct investment abroad by US MNCs as the tax payment is made by the US parent not the foreign subsidiary. The US BEA data only gives the corporate income tax paid outside the US, and most of the corporate income tax owed by this companies is owed in the US (though the US offers extensive deferral provisions).

    This Ebay example is what is supposed to happen with tax deferral provisions such as the ‘same-country exemption’ (which allows ‘double-irish’ type structures to work). Ebay could invest the money abroad tax free or if it chooses it can repatriate the profits to the US and the US corporate income tax payment up to the 35% federal rate becomes due.

    This seems to be a rare case of this happening. Apple with around $150 billion of retained earnings are going to return money to shareholders but instead of repatriating profits to do it are going to issue bonds to borrow it. If Apple does this outside the US it can ‘invest’ its retained earnings by repaying the bonds and the deferred US tax will never be paid.

    Pfizer with $70 billion of retained earnings are going to use the money to buy AstraZeneca. This is fine from a US perspective and is what the deferral provisions are designed for – giving US companies interest-free loans to allow them to increase their non-US presence. The inversion to the UK that will come with the acquisition is not what the US wants and completely removes not only the retained earnings but the entire company from the US system.

    The US is more likely to act against the inversions than the deferral provisions. But even getting consensus on that may be difficult as Republicans will argue the inversions highlight problems with the US tax code and it is that which should be changed not the addition roadblocks against inversions – the biggest of which seem to be to the UK not Ireland.

    Whatever is left of Pfizers retained earnings of $70 billion after the AstraZeneca acquisition will have a big once-off impact on UK GNP if the inversion does go ahead.

  3. In a issue related to the US tax code, Ebay’s 8-K SEC filing made yesterday for Q1 2014 has some interesting outcomes. The form is availble here but all you really need is:

    Non-GAAP earnings increased 11%, to $899 million or $0.70 per diluted share, over the prior year, driven by strong top line growth. A first quarter GAAP loss of ($2.3) billion or ($1.82) per diluted share, was due to a discrete tax charge of approximately $3.0 billion.

    From the income statement it can be seen that Ebay’s effective tax rate for Q1 2014 was:

    ($3,199mn/$873mn) x 100 = 366%

    The discrete tax charge was primarily because Ebay not intends to repatriate to the US around $9 billion of profits that were previously held ‘offshore’. Ebay probably used versions of the ‘double-irish’ tax strategy to trigger a deferral of the US corporate income tax liability using subsidiaries in Luxembourg and/or Switzerland.

    Tax payments such as this €3 billion will never appear in US BEA data on direct investment abroad by US MNCs as the tax payment is made by the US parent not the foreign subsidiary. The US BEA data only gives the corporate income tax paid outside the US, and most of the corporate income tax owed by this companies is owed in the US (though the US offers extensive deferral provisions).

    This Ebay example is what is supposed to happen with tax deferral provisions such as the ‘same-country exemption’ (which allows ‘double-irish’ type structures to work). Ebay could invest the money abroad tax free or if it chooses it can repatriate the profits to the US and the US corporate income tax payment up to the 35% federal rate becomes due. This seems to be a case of this happening.

    Apple with around $150 billion of retained earnings are going to return money to shareholders but instead of repatriating profits to do it are going to issue bonds to borrow it. If Apple does this outside the US it can ‘invest’ its retained earnings by repaying the bonds and the deferred US tax will never be paid.

    Pfizer with $70 billion of retained earnings are going to use the money to buy AstraZeneca. This is fine from a US perspective and is what the deferral provisions are designed for – giving US companies interest-free loans to allow them to increase their non-US presence. The inversion to the UK that will come with the acquisition is not what the US wants and completely removes not only the retained earnings but the entire company from the US system.

    The US is more likely to act against the inversions than the deferral provisions. But even getting consensus on that may be difficult as Republicans will argue the inversions highlight problems with the US tax code and it is that which should be changed not the addition roadblocks against inversions – the biggest of which seem to be to the UK not Ireland.

    Whatever is left of Pfizer’s retained earnings of $70 billion after the AstraZeneca acquisition will likely have a large once-off impact on UK GNP if the inversion does go ahead.

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