For example, Illinois-based AbbVie recently acquired Dublin-based Shire PLC for $54 billion and Pennsylvania-based Mylan acquired Abbott Laboratories’ overseas generic drugs segment for $5.3 billion.  Whenever a USA firm acquires a foreign firm and adopts that firm’s lower tax rate or establishes a holding company in a foreign country and adopts that firm’s lower tax rate the transaction is called an inversion.  Inversions are becoming very common out of fear that politicians will soon eliminate that cross-border tax strategy.  There were nearly 19 large corporate inversions in the USA in 2013, and more in 2014.   Inversions have led to a higher dollar value of mergers and acquisitions in the USA in 2014-2015 than in the past ten years.  Inversions are also becoming common because the old alternative strategy of simply reincorporating in, say Bermuda or the Cayman Islands, has been virtually eliminated by politicians.  Mylan, like many firms, used its foreign acquisition to reincorporate in the Netherlands, and then transfer pretax income from their domestic operations to their foreign parent through intercompany debt.  Similarly, Salix Pharmaceuticals in North Carolina recently acquired an Italian drug company and reincorporated in Ireland in the process.  Congress’ Joint Committee on Taxation says eliminating inversions would yield $19.46 billion more in tax revenue for the USA over ten years, but this will likely not get done for several years.

Source:  Based on Liz Hoffman and Hester Plumridge, “Race to Cut Taxes Fuels Urge to Merge,” Wall Street Journal, July 15, 2014, p.  A1-A2.