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Dislike US corporate taxes? Try a foreign merger

Wednesday, 31 Jul 2013 | 4:04 PM ET
Omnicom CEO John Wren and Publicis CEO Maurice Levy after announcing a merger of their companies
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Omnicom CEO John Wren and Publicis CEO Maurice Levy after announcing a merger of their companies

A tactic to avoid corporate taxes has U.S. companies on the move—merging with foreign firms and then setting up residence overseas.

On Monday, Michigan-based medicine manufacturer Perrigo agreed to buy the Irish drug company Elan for $8.6 billion. In the bargain, the combined company's headquarters will be in Ireland, which has a corporate tax rate of 12.5 percent, versus 35 percent in the U.S.

Just the day before, American advertising giant Omnicom Group announced plans for a $35 billion merger with France's Publicis Groupe, saying that the combined company's tax residence will be in the Netherlands, which has a 25 percent corporate tax rate.

(Read more: 3 mergers Cramer says investors shouldn't miss)

Analysts say such mergers are likely to continue.

"Without tax reform in the U.S., I think you will see more of these types of deals," said Ian Shane, a tax lawyer at Golenbock Eiseman Assor Bell & Peskoe.

"You have to start from the premise that most tax laws are a decade behind how business is done," he said. "More companies are global and looking globally, and taxes are part of the bottom line."

Calls to Omnicom from CNBC to discuss the tax issue in detail with were not immediately returned. A spokesman for Perrigo would not give any information on the record for this story.

However, in a conference call for reporters after Perrigo's announcement, Chief Financial Officer Nigel Cherkin acknowledged that being in Ireland would provide the company with more than $2 billion in tax deductions.

And Omnicom's CEO John Wren confirmed in a conference call after his firm's merger announcement that residence in the Netherlands was for tax purposes.

Michael Schwartz, director of accounting and taxes at the advisory firm WeiserMazars, said, "There is a tax on U.S. firms bringing profits from overseas, but if you're incorporated abroad, [the United States] can't tax it if you've merged with another company."

Altman on M&A
Ad agencies Publicis and Omnicom are merging, as are Perrigo and Elan. CNBC's Julia Boorstin has the latest action, and Roger Altman of Evercore Partners offers his take on these deals.

These recent mergers fly in the face of heavy criticism from those who say U.S.corporations don't pay their fair share of taxes in the first place and that loopholes allow most of them to avoid paying the full 35 percent rate.

In a Senate subcommittee hearing this past May, Apple was severely chastised for avoiding tens of billions of dollars in U.S. taxes on its income (all legally) by shifting the funds through a global web of offshore entities, including three that had no tax residency in any nation.

A report from the committee before the hearings said that those three entities were run by some of Apple's top executives but were located, on paper, in Ireland, though they in some cases had no employees.

(Read more: Experts predict long antitrust road for Omnicom, Publicis)

One entity reported $30 billion in net income for 2009-12, yet filed no corporate tax return and paid no income taxes to any government during those years, according to the report.

CEO Tim Cook defended Apple at the time saying, "We pay all the taxes we owe—every single dollar." He also insisted that the company doesn't rely on tax "gimmicks" and doesn't "stash money on some Caribbean island."

But it isn't necessary for U.S. firms to stash away money or rely on gimmicks in today's global economy, according to Shane, the tax lawyer.

"Countries in Europe and elsewhere are competing with each other with lower tax rates to bring in firms and have them headquartered there," Shane said. "They need revenues, but lower tax rates that bring in firms are much better than higher tax rates and not having anyone there," he added.

"Just look at the Netherlands," Shane said. "Firms headquartered there don't have to face rigid tax rules.They can apply for a ruling on the amount they want to pay and get it approved or not, just as long as they pay some taxes."

But a study released in December on U.S. corporate taxes stated that new companies are not avoiding the country in favor of tax havens. Among 918 new companies identified as multinationals with headquarters in the United States, just 27 were legally incorporated in tax havens.

"I think we can fine-tune our laws, but I don't see them as all that complicated," said Schwartz at WeiserMazars.

"Businesses don't all think alike when it comes to what they want when it comes to taxes. I actually think other countries will start to lean toward our model going forward," he said.

U.S. firms first pay income taxes to the countries in which profits were earned; the then pay additional U.S. taxes on any profits they bring home.

But since companies receive a tax credit for paying a foreign tax, the amount of tax they pay on foreign profits in the U.S. is equal to the difference between the U.S. rate and the foreign one. (For instance, a $100 profit in England at that country's 23 percent tax rate would come to $23 in those taxes. The amount paid to the U.S. on that $100 would total $12—the difference between 35 and 23.)

In a speech Tuesday, President Barack Obama said he wants to cut the corporate tax rate of 35 percent to 28 percent and give manufacturers a preferred rate of 25 percent. He also wants a minimum tax on foreign earnings as a tool against corporate tax avoidance and increased use of tax havens.

(Read more: Obama proposes 'grand bargain' on corporate tax rate, infrastructure)

But he tied the reform and the money generated by the tax overhaul to a mix of proposals such as funding for infrastructure projects and improving education at community colleges.

Congressional Republicans immediately condemned the plan, saying it further backs Obama's policies on taxes and spending "while leaving small businesses and American families behind." The GOP prefers a flat tax on corporate profits.

"They talk tax reform, but it's not going to happen," Shane said. "There's too much gridlock."

"In the meantime, U.S. firms will continue to explore other countries for what they think are better tax laws", he said.

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