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September 7, 2014 7:08 pm

Biggest tax inverters ‘have $21bn offshore’

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A Medtronic facility in Memphis, Tennessee, US©Bloomberg

Among companies pursuing so-called 'tax inversions' Medtronics holds the biggest offshore cash pile

Three US companies seeking to use controversial takeovers to cut their US tax bills hold at least $21bn in “trapped” offshore cash that the deals could unlock.

According to data compiled by Moody’s for the Financial Times, the biggest offshore cash piles held by companies pursuing so-called “tax inversions” belong to Medtronic, a medical devices group; AbbVie, a drugmaker; and Applied Materials, a technology group.

The deals enable US companies to shift their tax domicile to a country with lower tax rates by acquiring a foreign rival. The tax benefits include lower-cost access to existing offshore cash and to future non-US earnings.

Thirteen inversion deals worth $178bn have been announced since the start of 2013, according to Dealogic. Nine other companies doing inversions do not disclose their offshore cash while Mylan holds just $174m outside the US.

The deals have sparked political outrage, with President Barack Obama describing the companies as “deserters” that are “renouncing their US citizenship”.

Medtronic has predicted that its inversion would cut its effective tax rate by 1 to 2 percentage points from the 18 per cent it paid last year. Applied Materials said its deal would cut its tax rate from 22 per cent to 17 per cent. AbbVie said the inversion would reduce its tax rate from about 22 per cent to 13 per cent. However, the three companies have said that tax benefits are not the primary motivations for their deals.

Attacks on inversions will ramp up again this week as lawmakers return to Washington and the Democrats seek to make them a campaign issue ahead of midterm elections on November 4.

Chuck Schumer, a senior Democratic senator who will this week introduce legislation to curb the deals, told the FT: “We need to move quickly and aggressively to curtail inversions and prevent companies from using shady accounting practices to avoid their US tax obligation.”

According to Richard Lane at the rating agency Moody’s, who compiled the figures, US non-financial companies hold a total of about $950bn in overseas cash and liquid investments.

The obstacles to accessing it are not insurmountable, but companies are reluctant to do so while domiciled in the US because repatriating it would trigger a US tax liability.

Inversions allow companies to move cash more freely between overseas subsidiaries and their new foreign parents while bypassing US tax collectors. They will also be able to lend future earnings from the foreign parent to their US businesses and deduct interest payments on the debt from US tax liabilities, a practice known as “earnings stripping” that Senator Schumer is seeking to stop.

However, Bret Wells, a law professor at the University of Houston, said companies could not simply remit existing cash to their new foreign parents free of US tax, because their old foreign subsidiaries would remain owned by a US company, which would in turn be owned by the foreign parent.

“The bigger tax benefits will come from creating new foreign subsidiaries and channelling their future overseas earnings into them. They will have never been under a US ownership structure and will be beyond the reach of the US taxman,” he said.

Medtronic, which has struck a $42.9bn deal to buy Ireland-based Covidien, has $13bn of cash outside the US. It has said it wants to use cash generated outside the US to “invest much more aggressively in the US”.

Applied Materials has agreed a $9.3bn merger with Japan’s Tokyo Electron and will be domiciled in the Netherlands. The US group has $2.4bn in offshore cash and has said the inversion will create “a very free flow of cash” that could be used to pay dividends and buy back stock.

AbbVie has a cash pile of $10.2bn and says a “significant portion” is overseas. Moody’s estimates conservatively that at least half is outside the US. AbbVie, which has agreed to buy Ireland-domiciled Shire for £32bn, has said US taxes on repatriated cash put it at a disadvantage to non-US rivals in making investments.

The US Treasury is exploring waysto use executive action to curb the deals in the absence of legislation from Congress.

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