Tax Inversions: McDermott's Panama Move to Medtronic's Irish Merger

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Before 2017, U.S. companies faced a 35% corporate tax rate on worldwide income, while most developed countries taxed only profits earned inside their borders. A tax inversion let a company make a foreign entity its legal parent without moving offices or workers. The first, in 1983, took the Texas drilling firm McDermott International to Panama. In the late 1990s and early 2000s, naked inversions moved companies to Bermuda and the Cayman Islands with little more than a mailing address. The 2004 American Jobs Creation Act responded with a substantial business presence test, later set at 25% of employees, assets and income in the new country.

Companies then bought real foreign partners. Between 2012 and 2016 Burger King merged with Tim Hortons in a $12 billion deal, and Medtronic moved to Ireland through a $48 billion merger with Covidien while still earning over 60% of revenue in the U.S. Earnings stripping through intercompany loans and royalties drained U.S. taxable profit, and the CBO projected about $12 billion a year in lost revenue by 2027. The U.K. halted its own 2007 to 2010 exodus by cutting rates to 19% and going territorial. The U.S. Treasury blocked the $160 billion Pfizer and Allergan merger, and the 2017 Tax Cuts and Jobs Act cut the rate to 21%, after which the inversion wave collapsed.

• Inversions forced long-term U.S. shareholders to recognize capital gains on shares they never sold.
• Apple moved $300 billion of intellectual property into Ireland in 2015, lifting Irish GDP by double digits.
• From 2014 to 2016 the Treasury issued targeted rules to break the structures behind pending deals.
• The 2017 law limited deductions on intercompany interest and taxed outbound royalty transfers.
• In 2019 AbbVie bought Allergan and kept the combined company based in the United States.