U.S. corporations have largely abandoned the contentious deals that allowed them to shift their addresses abroad for a lower tax rate. Yet a key part of the transactions is continuing quietly even after President Donald Trump’s tax overhaul.
The 2017 tax law was designed to stop traditional inversions, which had brought scrutiny and negative publicity for companies that moved their headquarters overseas, as well as to halt the flow of valuable intellectual property to low-tax countries. For companies that invert, the address change is generally the final step so they can more easily access the cash they’ve generated after years of shifting IP overseas.
Most firms are continuing with business as usual when it comes to their IP since the law’s provisions aren’t enticing enough for them to keep it at home, according to interviews with eight tax experts who advise large public corporations. They disclosed the details of the conversations they’re having with companies, but declined to identify the specific clients.
The problem: such IP moves mean that other countries ultimately get to collect the billions of dollars of tax revenue generated by many U.S.-made innovations, including life-saving drugs, the algorithms that power social media networks, and the software running computers and smartphones.
“It’s not changed the kinds of tax planning we’ve talked about for 20 or 30 years,” said Linda Pfatteicher, managing partner of law firm Squire Patton Boggs’ San Francisco and Palo Alto offices. “The changes just tweak around the edges.”
That’s a blow to Republicans’ plans, which had intended for the law’s corporate rate cut and overhaul of international tax rules to remove the incentives to shift IP abroad and invert. The U.S. now has a corporate rate of 21 percent, lower than the previous 35 percent but still pretty average when compared to other countries with developed economies. And it’s high relative to the 12.5 percent rate in Ireland, a popular destination.
For years, U.S. companies, especially in the technology and pharmaceutical industries, have shifted patents and software to subsidiaries in low-or-no tax countries, and paid the foreign firms licensing fees to use the assets. Those franchise fees and royalty payments were booked as income offshore and taxed at the other country’s lower rate. A change in headquarters was the choice for the most tax-averse companies. The 2017 tax law was supposed to change all that.
‘Still Beneficial’
The law attempts to deter profit shifting and make sure companies are paying a minimum amount of tax in the countries where they store their IP. If the offshore tax rate is at least 13.125 percent, the company isn’t supposed to owe anything to the U.S. Internal Revenue Service. If it’s below that rate, in most cases the company will only owe a couple of additional percentage points in what’s called the Gilti tax to the U.S. -- still below the 21 percent it would pay if those assets were in the U.S.
For example, U.S. corporations in Ireland would pay about an additional half a percent to the IRS.
“The raw math is still beneficial to move that out of the U.S.,” said Albert Liguori, a managing director with consulting firm Alvarez & Marsal. “There’s a concern that once you come into the U.S., you can’t get it out.”