10/4/19: How US Tax Inversions Affect Shareholder Wealth

Our article on how corporate tax inversions impact shareholders' wealth is now available on Columbia Law School blog: http://clsbluesky.law.columbia.edu/2019/04/10/how-u-s-tax-inversions-affect-shareholder-wealth/.

9/1/19: Corporate tax inversions and shareholder wealth

Our new paper "U.S. Tax Inversions and Shareholder Wealth" has been accepted for publication in the International Review of Financial Analysis:

The paper abstract:
"We examine a sample of corporate inversions from 1993-2015 by firms active in the U.S. markets and find that shareholders experience positive abnormal returns in the short-run. In the long-run, inversions have a deleterious effect on shareholder wealth. The form of the inversion and country-pair differences in geographic distance, economic development and corporate governance standards are determinants of shareholder wealth. Furthermore, we find evidence of a negative and non-linear relation between CEO total return and long-run shareholder returns."

28/1/16: Irish M&As: Not Too Irish & Mostly Inversions

Experian latest figures for *Irish* M&A activities for 2015 show some astronomical number: Per release: “The number of deals on the Irish mergers and acquisitions (M&A) market increased by 10 per cent last year, its strongest performance since 2008…” Which is not what is impressive. Although the overall number of actual transactions hit 458 in 2015, up from 416 the previous year, it is the value of transactions that is beyond any belief.

Again, per Experian: “The total value of transactions reached €312 billion – up from €154 billion in 2014 and by some way the most valuable year for corporate deal making in the country’s history. Activity continues to be driven by the pharmaceuticals and biotech sector.” This number is a third higher than the value of exports of good and services from Ireland over the period of 12 months through 3Q 2015 and it is almost 60 percent higher than Irish GDP. In other words, using normal valuations multiples, you should be able to buy anywhere between 1/4 and 2/5 of entire Ireland on this money. In one go, and forever… And that’s one year worth.

Per Experian: “Irish deals accounted for around 3.6% of the total volume of European transactions in 2015, but 20.5% of their total value. In 2014, the Republic of Ireland again featured in 3.6% of European deals but contributed just 12.7% to their overall value.”

So conservatively, let’s say 1/3 of Ireland bought last year and, say 1/5 in 2014… that’s half the country economy in two years.

But how on Earth can a little country like Ireland attract such a level of financial activity? Why, remember that magic word… ‘inversions’ - yes, that same word that out Government denies applies to Ireland.

Well, Experian provides a small insight (they wouldn’t tell us the full story, but they can’t quite escape from telling us some. Enjoy the following: per Experian, Top 5 “Irish” deals announced in 2015 includedd:

• Pfizer-Allergan at EUR143.564 billion
• Teva Pharma - Generic drug business of Allergan at EUR35.454 billion
• Shire - Baxalta at EUR29.533 billion
• Willis Group Holdings - Towers Watson deal at EUR15.566 billion, and
• CRH - Holcim & Lafarge deal at EUR7.671 billion

So, yep: tax inversion at the top, related to tax inversion at No.2, tax inversion at No.3… and none (repeat - none, including CRH deal) related in any way to Ireland, except for tax domicile of the companies involved.

Repeat with me… “There are no tax inversions into Ireland”… now, with zombie like intonation, please… “There are no…”

26/11/15: On a long enough time line: Irish corporate inversions

Recently, I covered the Pfizer-Allergan ‘merger’ just as Irish media navel gazed into the usual ‘jobs for Ireland’ slumber.  [You can trace much of it from here: http://trueeconomics.blogspot.ie/2015/11/201115-inversion-debate-isnt-over.html]

Now, few links that catch up with my analysis:

1. Irish Times reported that the Exchequer may gain up to EUR620m in Pfizer’s Allergan deal, annually. Key quote: “Last year, Pfizer paid an effective tax rate of 26.5 per cent as a US company. Post-merger, it expects to pay between 17 and 18 per cent across the group. In Ireland, it will pay our 12.5 per cent tax rate on any international income routed through the new Dublin operation.” Err, Irish Times, no. Pfizer will be paying lower effective rate than 12.5% because it will be able to avail of the famous/infamous OECD-allegedly-compliant ‘Knowledge Development Box’. How much lower? Ah, who knows. http://www.irishtimes.com/business/health-pharma/state-may-gain-up-to-620m-in-pfizer-s-allergan-deal-1.2441324
2. Bloomberg covers the same deal with a heading: “Pfizer's Viagra Tax Dollars Head to Dublin as U.S. Loses Again”. A bit of a miss, as Ireland already milks Viagra fortunes, though with the new ‘investment’ that will most likely increase. http://www.bloomberg.com/news/articles/2015-11-23/pfizer-s-viagra-tax-dollars-head-to-dublin-as-u-s-loses-again. Key quote: ““We are not pushing for inversions,” Irish Finance Minister Michael Noonan told reporters in Brussels on Monday, referring to the controversial transaction meant to cut corporate tax rates. The agency charged with winning investment for Ireland “never promotes inversions. It’s a decision for the two companies.” While Noonan said Allergan and Pfizer were plainly merging for “tax advantages,” the government has no problem with the deal as both companies had “substantial” operations in Ireland.” You have to be laughing… the same defence [we are not doing anything, all their fault] has been used in the past by Swiss and other tax havens to justify the arrival of tax-‘optimising’ money into the banks vaults. Now, it is Ireland’s turn. But for comical relief, we have this: “Patrick Coveney, chief executive of Greencore Group Plc, the Irish food company that’s the biggest sandwich maker in the U.K., told state-owned RTE Radio in Dublin on Tuesday that Pfizer’s proposed deal builds on its and Allergan’s presence in Ireland.” Yes, sandwich maker knows a thing or two about pharma and biotech. Next up: newsagent comments on new nuclear power plant design in the UK…
3. Not to be left behind, U.S. politicians are jumping on a carbon copy of the bandwagon too scared to actually join the bandwagon itself. Per Zerohedge: http://www.zerohedge.com/news/2015-11-23/hillary-slams-unfair-tax-inversions-after-sanders-calls-pfizerallergan-deal-disaster “Hillary Slams "Unfair" Tax Inversions After Sanders Calls Pfizer/Allergan Deal "Disaster For Americans”” Apparently, following in the footsteps of the completely out-of-touch Bernie Sanders, Hillary Clinton “firmly believes businesses should get ahead by building a stronger economy here at home, rather than using tax loopholes to shift earnings overseas, or to move abroad to escape paying their fair share.” Hillary went on to do what politicians do best: promise to do something. “In the weeks ahead [no idea when] I will propose specific steps to prevent these kind of transactions… I urge Congress to act immediately [pretty definitive timeframe when urging other to do something though] to make sure the biggest corporations pay their fair share, and regulators also should look hard at stronger actions they can take to stop companies from shifting earnings overseas.” So in basic term, Hillary has nothing to say other than that she has to say something. That’s novel.

All of this would be gas were it not serious. Despite Irish Government promises to curb ‘harmful’ tax practices, despite our vocal ‘compliance’ with the spirit of the OECD ‘reforms’, Ireland remains a premier destination for tax inversions from the U.S. Worse, everyone now knows this, and no one is doing anything about it. Worse, yet, everyone is next going to be aware of the simple fact that no one is doing anything about it.

On a long enough timeline, things will be easier in the short run as Irish Exchequer milks the rest of the world for tax optimising commissions. In the long run… well, we might have to start looking into how we will pay all these future pensions when the penny finally does drop in Washington and Berlin…

20/11/15: The Inversion Debate Isn’t Over: Credit Suisse

A brief Credit Suisse note on corporate inversions, with an honourable mentioning for Ireland: https://www.thefinancialist.com/spark/the-inversion-debate-isnt-over/ over the story covered on this blog earlier (see background here including further links).

I especially like that little twist on tax optimisation that are inter-company loans: whilst the original inversion leads to a direct negative impact on tax revenues for our trading and investment partners, it adds a cherry on the proverbial cake by reducing companies' tax liabilities even further through lending to U.S.-based business.

OECD compliant, it all is...

30/10/15: None of Them 'Harmful' Tax Inversions, Dupes...

Remember how in recent months, on foot of an uproar in the U.S. and across the EU, Irish Government has told us that there will be no ‘harmful’ corporate inversions? In other words, there will be no redomiciling of the U.S. companies into Ireland purely for tax purposes?

Well, the mother of all inversions is currently underway, and it is brand new. Behold, Allergan (Irish-based previously inverted U.S. company making Botox) is in talks with Pfizer (U.S.-based global pharma giant) on a merger that will lead to, well, in the words of BusinessInsider: “In this case it would have Pfizer moving its tax domicile - not necessarily its management headquarters - to Ireland, where Allergan is based.”

Read more on this here: http://uk.businessinsider.com/pfizer-allergan-tax-inversion-2015-10?r=US&IR=T

So about none of that business with ‘harmful’ inversions thus?..  staying all OECD-compliant...

6/2/15: Two Tax Inversions Islands

Remember Tax Inversions Islands? Ireland ≠ Bermuda?

Bloomberg have a neat reminder:

Source: http://www.bloomberg.com/infographics/2014-09-18/tax-runaways-tracking-inversions.html

26/9/2014: Some recent links on tax inversions

Some interesting recent articles on tax inversions and Irish role as a tax-conduit to tax havens:

US Treasury new rules tightening tax inversions: http://www.treasury.gov/press-center/press-releases/Pages/jl2645.aspx

And Irish reaction to these: http://businessetc.thejournal.ie/us-tax-inversions-ireland-1685263-Sep2014/?utm_source=twitter_self and here: http://www.irishtimes.com/business/economy/us-launches-crackdown-on-overseas-tax-avoidance-1.1938583

While markets broader impact here: http://www.reuters.com/article/2014/09/23/us-usa-tax-inversion-idUSKCN0HI1WK20140923?feedType=RSS&feedName=topNews&utm_source=twitter

Here is a more detailed discussion of the net impact of the new rules, mentioning so-called 'Levin solution' http://fortune.com/2014/09/24/the-treasurys-chicken-soup-take-on-tax-inversions/

And an earlier article from Arthur Cox solicitors on the benefits of inversions into Ireland and associated restrictions: http://www.arthurcox.com/wp-content/uploads/2014/07/April2014_SpotlightOn.pdf Hilariously, the above quotes: "Ireland is a popular country for inversions because of its favorable tax regime and extensive tax treaty network."

And an official response from Ireland to US tightening is 'not our problem': http://www.irishtimes.com/business/economy/kenny-defends-us-firms-irish-presence-1.1939192#.VCKA645RJ3A.twitter

You can track previous articles and posts on Ireland's role in global tax optimisation by searching this blog for "corporate tax". 

26/8/2014: Betting on Corporate Tax Inversions? Ireland almost made the top of this strategy...

These haven't been slow-days-of-summer on the Irish corporate tax reputation front.

Few weeks ago, the story of Microsoft admission of holding a USD92bn large stash of cash in locations, including Ireland, has been put out to air: http://billmoyers.com/2014/08/23/microsoft-admits-keeping-92-billion-offshore-to-avoid-paying-29-billion-in-us-taxes/

And today, an interesting disclosure on foot of Ireland-free tax inversion deal by the Burger King popped up: a fund investing in tax inversion companies https://www.motifinvesting.com/motifs/tax-inversion-targets#/overview where Ireland is the second largest exposure after the UK...

These folks should list on Irish Stock Exchange... oh, poor Bermuda and Bahamas, obviously lacking in that skills-and-talent competitiveness we have so much of.

Time for another 'We Are Not a Tax-Haven' white paper from one of the Departments...

You can track my notes on the topic starting from here: http://trueeconomics.blogspot.ie/2014/08/382014-this-week-in-corporate-not-tax.html

3/8/2014: This Week in Corporate 'Not Tax Haven' News

Some links from recent press articles on Irish Corporate Tax regime:

• BloombergView on the U.S. politicians' logic concerning the issue of tax breaks: http://www.bloombergview.com/articles/2014-07-28/by-lew-s-logic-all-tax-breaks-are-unpatriotic With respect to Ireland, it no longer matters if there is any logic whatsoever to the U.S. Government and senior officials' statements on the matter. What does matter, however, is that we are now being increasingly / more frequently presented as an international tax arbitrage facilitators. That is the reputational cost of our decades-long policies. The real economic cost of our tax policies is that we no longer have any meaningful strategy or long-term outlook on manufacturing, productivity growth and/or investment. Instead, we have a strategy that relies, in part explicitly, but in full implicitly, on beggar-thy-neighbour tax arbitrage facilitation. 
• Vox provides its own musings on the matter in "Tax inversions: 9 questions about the hottest new trend in tax avoidance" article. It describes tax inversion with a direct reference to Ireland (and Switzerland) as: "So a company whose business is subject to relatively heavy taxation in one country (say, the United States) can buy a smaller company located in a country where its business is taxed at a lower rate (say, Ireland) and then declare the merged entity to be domiciled in the low-tax country for the purposes of taxation. Walgreens, for example, is in the process of buying a Swiss company called Alliance Boots and is considering re-labelling itself as a subsidiary of the Swiss company to pay lower Swiss tax rates." This is not a debate about Double-Irish scheme or other aggressive tax optimisation loopholes, but about the actual headline tax rate - the sacred Irish cow of 12.5%. And this is serious, real danger to Ireland, as we have no meaningful industrial / manufacturing / services etc growth pillars outside our reliance on tax-attracted FDI. The full article is here: http://www.vox.com/2014/7/28/5944263/corporate-tax-inversions-deserters-vs-economic-patriotism
• Reuters wades in with an excellent piece on the potential costs of Ireland losing the war on international tax regime. "Ireland has too much to lose to deter U.S. companies re-homing" (http://www.reuters.com/article/2014/07/30/us-usa-tax-ireland-analysis-idUSKBN0FZ1FA20140730?feedType=RSS&feedName=businessNews) also dives into the issue of our 12.5% rate. "It would be difficult to block inversions without jeopardizing the broader benefits," says the author. Which I agree with. We have lost the leadership momentum in the global debate on tax optimisation and now our headline rate is firmly in the crosshair. But our delirious tax advisory experts are still not getting the picture: ""It's a dangerous road to go down," said Kevin McLoughlin, who as head of tax at accounting firm Ernst & Young… I really struggle to see how they can legislate against companies choosing Ireland as a destination in a way that's confined only to these types of situations. I think it's extremely unlikely because I just don't know what they can do." Well, the problems of legislating outside of Ireland may be tough, but I'd love to see Kevin struggling to fill the potential void left in our economy if the legislators abroad do succeed in legislating on the matter. Somehow, I doubt EY will be that creative with coming up with economic development strategy ideas as they are with coming up with tax optimisation ideas.
• Robert Reich writes in Salon.com that “American” corporations are a farce (http://www.salon.com/2014/07/29/robert_reich_american_corporations_are_a_farce_partner/) and names a list of the Irish-based European operations of blue-chip corporates as the "American farce". Reich pushes the agenda of tax optimisation to R&D supports… which is… oh, surprise surprise, at the top of Irish Government agenda… Now, is there an area of tax arbitrage we haven't captured yet?..
• Last, but not least, remember the solemn, stern statements from Irish senior public figures arguing that Ireland does not promote itself as a tax arbitrage play, but rather focuses on 'human capital', 'regulatory environment' (aka - regulatory arbitrage) and 'headline rate of tax' (aka - inversions-enabling rate)? Well, they don't have to - instead of senior political and state leaders, we have a swarm of senior lawyers and accountants and corporate finance specialists and… to do the bidding, as reported by Reuters in "Irish, Dutch, UK law firms in tax inversion beauty contest in U.S." (http://www.reuters.com/article/2014/07/24/deals-taxinversions-lawfirms-idUSL2N0PK1L820140724).

Time to cut some FDI ribbons, Ministers…

Note: you can track previous links and discussions relating to Irish corporate tax policies and debates by using 'search' option for 'corporate tax' on this blog or by following blog-links from here: http://trueeconomics.blogspot.ie/2014/07/2672014-this-week-in-corporate-not-tax.html

26/7/2014: This Week in Corporate 'Not Tax Haven' News

Earlier today I wrote about the round of 'assert-deny' salvos fired across Ireland's deck by German economic policy adviser and the Department of Finance (http://trueeconomics.blogspot.ie/2014/07/2672014-of-germans-bearing-ugly-truth.html). This was hardly the only defensive that Ireland Inc had to run this week. A much larger one came on foot of the US President Barak Obama singling Ireland out as the key global player in the dirty game of corporate tax inversions.

Newsflow was not too generous to Ireland on this front (corporate tax evasion and optimisation) this week.

It started with a report by Reuters (http://www.reuters.com/article/2014/07/24/deals-taxinversions-lawfirms-idUSL2N0PK1L820140724) on how Irish legal eagles are leading the way in advertising this land of human capital and regulation arbitrage riches as a [not a] tax haven. Singled out in the report are: Arthur Cox, A&L Goodbody, and Matheson. But other firms are into this game too. And not just in the US. In fact, there are plenty 'country specialists' employed in the legal offices in Ireland and around the world, tasked with 'selling' Ireland's 'unique competitiveness points' to potential clients interested in optimising their tax exposures.

Obama weighted in later in the week and, of course, the Government had to weigh in with a hefty doses of 'we deny we do it': http://www.businessworld.ie/bworld/livenews.htm?a=3192721 and http://www.reuters.com/article/2014/07/25/ireland-tax-inversions-idUSL6N0Q03LS20140725

The problem is that denying direct Government involvement is hardly a defence. Facts are: Ireland is being promoted as a tax optimisations destination and not solely on foot of our headline 12.5% tax rate. This promotion is known, brazen and visible, and it comes via law firms with direct links - contractual and advisory - the the Government and the State.

And the stakes, relating to the above promotion, are high: http://www.independent.ie/business/irish/accountants-warn-tax-changes-could-harm-investment-30457978.html on policy side and on business side: http://www.independent.ie/irish-news/google-pays-27m-corporation-tax-on-17bn-revenue-30458696.html

In short, things are ugly and are going to get even more ugly as OECD is preparing road maps for addressing more egregious abuses, while the US, UK, EU, European member states and even Australia and Japan are now firmly in the need to 'do something' about losses of Government revenues arising from sharp tax optimisation practices. Irish Government can put as many junior ministers as it wants onto RTE to talk about Ireland being 'unfairly singled-out' or 'misunderstood' or whatever else, but

1. Fact remains fact: tax arbitrage policies of this state are starting to cost us dearly in reputation and actual economic costs (http://trueeconomics.blogspot.ie/2014/06/2562014-imf-on-corporate-tax-spillovers.html and http://trueeconomics.blogspot.ie/2014/06/1762014-irelands-regulatory-resource.html and http://trueeconomics.blogspot.ie/2014/02/822014-yahoos-tax-base-err-optimisation.html and http://trueeconomics.blogspot.ie/2014/01/2112014-no-special-ict-services-tax-but.html)
2. We are but a small open economy caught (due to our own fault) in between the irate giants who not only set global policies, but also control our access to markets and investment

Time for us to stop playing ostriches with our ministers, but to get into the game of leading the reforms at home and internationally.