Guinness isn’t the only reason to go to Ireland anymore. Ireland’s status as a tax haven has continued to attract companies who are unhappy with America’s sky-high corporate tax rate. With another major US corporation moving overseas through a merger, American politicians are forced to reevaluate corporate tax policy in order to maintain its tax base.
Over the past decade, a number of multi-national corporations have relocated to Ireland. These firms include Intel, Dell, Pfizer, Google, Hewlett Packard, Facebook and Johnson and Johnson. ((Henry McDonald, 700 US Companies now located in Ireland as Direct Investment Soars, The Guardian (Mar. 5, 2015), http://www.theguardian.com/world/2015/mar/05/ireland-attracts-soaring-level-of-us-investment.)) These mergers—called inversion mergers—allow U.S. Corporations to shift their legal address to a foreign jurisdiction with a lower tax rate by either purchasing or merging into a foreign corporation. Though Michael Noonan, the Irish Minister for Finance, claims that Ireland is not a tax haven, it is hard to argue against the facts. ((Cillian Doyle, Ireland The Tax Haven that dare Not Speak Its Name, Counterpunch (Jan. 12, 2016), http://www.counterpunch.org/2016/01/12/ireland-the-tax-haven-that-dare-not-speak-its-name/.)) Ireland has a less transparent tax collection system and a lower effective corporate tax rate than many other OECD countries. ((See Vanessa Houlder and Vincent Boland, Corporate Tax: The $240bn Black Hole, Financial Times (Nov. 24, 2015 7:14 PM), http://www.ft.com/intl/cms/s/0/86567a32-91d5-11e5-bd82-c1fb87bef7af.html#axzz3yeSI1uqP.)) While the effective tax rate that corporations face is unique from corporation to corporation it is undebatable that America has one of the highest corporate tax rates of developed countries. Out of the 34 countries in the OECD, “America ranks first with a 39.1 percent corporate tax rate, compared to an OECD average of 24.1 percent.” ((Derek Tsang, Does the U.S. have the highest Corporate Tax Rate in the Free World?, PolitiFact (Sept. 8, 2014), http://www.politifact.com/punditfact/statements/2014/sep/09/eric-bolling/does-us-have-highest-corporate-tax-rate-free-world/.)) Even when looking at the effective tax rate (which includes various tax deductions), America’s effective rate for 2014 was 27.9 percent (ranking the U.S. second-highest behind New Zealand). ((Id.)) To juxtapose, Ireland’s corporate income tax rate is just 12.5 percent. ((Id.)) If America hopes to maintain its corporate tax base, it will have to either implement further regulation that forces corporations to pay American taxes if they want to conduct business in the country, or it will have to lower the tax rate that these corporations are forced to pay.
While some companies save money by simply shifting assets to lower tax jurisdictions, there are additional benefits to being physically headquartered in Ireland. Companies investing in research and development will be able to pay just 6.5 percent tax under Ireland’s new “knowledge development box” tax. ((Colm Keena, New Corporation Tax Rate of 6.25% for R&D, The Irish Times (Oct. 13, 2015), http://www.irishtimes.com/business/economy/new-corporation-tax-rate-of-6-25-for-r-d-1.2388977.)) This rate only applies to business activity arising from “research and development that took place in Ireland.” ((Tim Wortsall, Ireland Reduces Corporate Income Tax Rate to 6.5%; Good, but the Correct Rate is 0%, Forbes (Oct. 15, 2015), http://www.forbes.com/sites/timworstall/2015/10/15/ireland-reduces-corporate-income-tax-rate-to-6-5-good-but-correct-rate-is-0/#4308ab2836d8 .)) Though many corporations already harbor many of their assets in foreign nations, inversion mergers allow for companies to use their foreign assets with more discretion. The Irish government argues that this policy makes sense for their own economic well being because “the government will almost certainly get more tax off the incomes of the researchers than they would have got through the corporation tax anyway.” ((Id.))
Most recently, Johnson Controls, an industrial-systems and battery maker who has been headquartered in Milwaukee since the 19th century is merging with Tyco International PLC and it will take on Tyco’s Irish tax address. ((Bob Tita and Dana Mattioli, Johnson Controls, Tyco to Merge in Inversion Deal, The Wall Street Journal (Jan. 25, 2016), http://www.wsj.com/articles/johnson-controls-tyco-to-merge-in-inversion-deal-1453724828.)) While some may feel that the move is un-American, it is hard to argue with the logic of Johnson’s directors. In 2015, Johnson Controls had a 27.89% effective tax rate. ((Johnson Controls’s Annual Effective Tax Rate, CSIMarket.com, http://csimarket.com/stocks/singleProfitabilityRatiosy.php?code=JCI&itx (last visited Jan. 29, 2016).)) Meanwhile, Tyco, a similarly large corporation only paid 17.98 percent tax in 2013 and 3.92 percent tax in 2014. ((Tyco International Ltd.’s Annual Effective Tax Rate, CSIMarket.com, http://csimarket.com/stocks/singleProfitabilityRatiosy.php?code=TYC&itx (last visited Jan. 29, 2016).)) The Johnson Controls-Tyco merger is similar in character to the largest merger of 2015, the Pfizer-Allergan merger. That merger, worth approximately $160 billion was similarly tax motivated and included corporations from the United States and Ireland. ((Kevin McCoy, Pfizer and Allergan Merge in 160B Tax Inversion Deal, USA Today (Nov. 23, 2015), http://www.usatoday.com/story/money/2015/11/23/pfizer-allergan-merger/76248478/ .))
Many companies domiciled in Ireland have seen their stock price surge after the move. And, while the past year has not been nearly as kind to Irish based companies, when looking at the 5-year gain, the picture is much rosier. ((Matt Krantz, This Tax-avoiding Haven’s Luck is Running Out, USA Today (Nov. 23, 2015), http://www.usatoday.com/story/money/markets/2016/01/25/tax-havens-luck-running-out/79316704/.)) For example, Allergan has seen 444.2 percent growth over the past 5 years. ((Id.)) Also, companies like Accenture have seen stock gains of over 95 percent. ((Id.)) Johnson Controls and Tyco project “at least $650 million in savings, which the companies said would be achieved over three years, including $150 million in annual tax savings.” ((Jennifer Surane, Johnson Controls buys Tyco; will Move to Ireland, Chicago Tribune (Jan. 25, 2016), http://www.chicagotribune.com/news/sns-wp-blm-johnson-controls-cd1ecaac-c36a-11e5-b933-31c93021392a-20160125-story.html.))
It would not be surprising if many Americans were upset about this continued exodus. The erosion of the tax base leads to smaller government revenues despite continued economic activity. However, corporations are beholden to shareholders. Directors owe fiduciary duties to maximize wealth for the corporation and shareholders. ((See Dodge v. Ford Motor Co., 170 N.W. 668, 684 (1919).)) This notion has been an underpinning of American corporate law for years. Therefore, it may be contradictory for the government to argue that corporations are acting unethically when these inversion mergers often cause share prices to spike dramatically. It seems that America’s focus on share price and lack of recognition for other corporate responsibility may end up pushing corporations out of the country entirely.
In the past two years, America has seen at least two major corporations move abroad. In order to halt the parade, the obvious solution is to lower the corporate tax rate. While being domiciled in America undeniably offers numerous benefits like stability and transparency, those seem to be less persuasive than those offered by Ireland and other tax havens.
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