US companies save on taxes as relocating in Europe

A growing number of US companies succeed in saving hundreds of millions of dollars in tax by relocating to Europe after completing takeovers on the continent.

Some of the significantly big mergers and acquisitions so far in 2013 have involved so-called “tax inversions” – where a US acquirer shifts overseas, to Europe in particular, to pay a lower rate.

Earlier this year Apples CEO was called to testify because of the Senate Permanent Subcommittee on Investigations found that Apple has avoided paying $9 billion in taxes for the last year using Irish subsidiaries who have no residence for tax purposes. The case is a part of a broader problem of companies using tax law imperfections to claim more of their income deriving from abroad. But this underlines the trend of many companies tending to outsource operations in order to escape from high US taxes.

There are vast amount of options where tax law should be changed in a way to bring those income tax funds in US. Some suggest a tax of overseas earnings of around 15%. Apple’s CEO Tim Cook endorsed a corporate tax revision that would make the tax law more flexible than the existing 35% and impose a reasonable tax rate on foreign earnings.

Michigan-based pharmaceuticals group Perrigo has said its acquisition of Irish biotech company Elan will lead to re-domiciling in Ireland, where it has given guidance it expects to pay about 17% in tax, rather than an estimated 30% effective rate it was paying in the US. Deutsche Bank estimates Perrigo will achieve tax savings of $118 million a year as a result.

Actavis’s acquisition of Warner Chilcott in May will also result in a move to Ireland, where Actavis tax rate will fall to about 17% from an effective rate of 28% tax, and enable it to save an estimated $150 million over the next two years.

While those acquisitions were not based only on tax cut strategy, M&A advisers say the number of companies seeking to re-domicile outside the US after a takeover is rising.

“We have seen an increasing number of US inversions in the last couple of years, first on a standalone basis and, more recently, as part of M&A deals,” said for Financial Times, Mark Kingstone, a tax partner at law firm Linklaters. “As cross-border M&A activity increases, this trend may continue.” he added.

Political debate on US tax intensifies as Democrats, Republicans and the White House agree that the current policy, which imposes a top rate of 35% but offers plenty of tax breaks, is in need of reform.