Kevin Dowd February 25, 2016
Two U.S. legislators introduced a bill Tuesday seeking to dissuade corporate inversions—the process of American businesses merging with companies overseas and relocating their headquarters in order to reduce stateside tax bills.
Introduced by Reps. Sander M. Levin (D-MI) and Chris Van Hollen (D-MD), the bill would focus on earnings stripping, wherein companies take on debt from a parent company overseas, then deduct the interest payments on that debt from their U.S. earnings, paying less income tax as a result. The bill, aptly named the Stop Corporate Earnings Stripping Act of 2016, could curtail a stream of massive deals that are the result of major U.S. corporations seeking ways around the tax code.
The largest such deal is Pfizer’s (NYSE: PFE) upcoming $160 billion merger with Allergan (NYSE: AGN), in which the U.S. pharmaceutical giant will move its headquarters from New York to Dublin. Other recent examples are particularly galling to U.S. lawmakers. Take for instance Johnson Controls (NYSE: JCI), a producer of automotive parts that received $299 million in federal bailout funding after the 2008 financial crisis. In late January, the company announced a merger agreement with Tyco (NYSE: TYC), with Johnson Controls moving its legal headquarters to Ireland to save an estimated $150 million annually on its taxes.
The proposed legislation wouldn’t do away with such deals entirely. Instead, it would lower the amount of earnings that can be deducted from 50% to 25%, among other tweaks. The bill would apply to deals completed after May 8, 2014.
Pfizer’s mega-merger with Allergan is the biggest example, but plenty of others companies have pursued earnings stripping as a way to save some coin. Here are some of the biggest corporate inversions of the past few years: