Corporate moves overseas concern Delaware officials

WASHINGTON –

Delaware officials are becoming more concerned about a spike in the number of businesses reincorporating overseas to dodge U.S. taxes.

On Friday, pharmaceutical giant AbbVie became the latest U.S. company seeking to shift its tax residence abroad through a merger with a foreign partner, in this case Shire Pharmaceuticals.

Such maneuvers, in which a U.S. company merges with a foreign company and reincorporates abroad to reduce its U.S. tax burden, is known as an "inversion." And they are on the rise.

Recent data from the Congressional Research Service show 47 companies, many in the pharmaceuticals business and many that were incorporated in Delaware, have done inversions in the past decade, compared to 29 in the previous two decades. And a dozen U.S. companies are eyeing inversion deals.

The concern for Delaware, the legal home of choice for most Fortune 500 companies, is that corporate desertions could threaten the $1 billion in revenue the state draws each year from corporate franchise taxes and fees, said Jeff Bullock, Delaware's secretary of state.

"It's a matter of some importance to us, not only in terms of the Delaware corporate franchise but our country's competitiveness," he said.

The issue is likely to be a main topic at a Senate Finance Committee hearing Tuesday on the U.S. tax code.

Sen. Tom Carper, D-Del., a member of the committee, said the nation's "outdated" tax structure motivates companies to harbor money and relocate jobs overseas. He said inversions show how critical it is for Congress and the Obama administration to work together on comprehensive tax reform, something he's been pushing with colleagues on both sides of the aisle.

"We can't allow this to become a trend, where companies that have benefited greatly from our universities, our workforce, and our local, state and federal tax dollars pack up and go overseas because of our outdated corporate tax structure," he said in a statement.

Rep. John Carney, D-Del., a member of the House Financial Services Committee, also said it's time to reform the nation's "outdated, complicated and anti-competitive tax code," which he said is the driving force behind the inversion surge.

Almost two-thirds of Fortune 500 companies are incorporated in Delaware, which gets more than a quarter of its revenue from corporate franchise fees. That's the state's second-largest revenue stream behind the state income tax. Bullock said the largest publicly traded companies could pay as much as $180,000 in corporate franchise taxes. If enough of these companies left Delaware and reincorporated elsewhere, Delaware's legal community could suffer a loss of business in addition to the state losing revenue, Bullock said.

"For us, it's just indicative of an emerging challenge that we all pay attention to before it gets out of hand," he said.

Of the 47 companies that inverted in the last decade, at least 21 – and potentially more – were Delaware corporations immediately prior to their inversion, Bullock said. If those companies had continued to pay franchise taxes at the rates they were paying when they departed, they would have contributed about $2.1 million in tax revenue to the state. Higher tax rates that went into effect in 2009 would have brought the total up to about $2.5 million, according to Bullock.

In 2012, for instance, Delaware lost Aon Corp., a risk management business, when it moved its Chicago headquarters and its Delaware incorporation to Britain. The state had a scare this spring when New York-based Pfizer attempted to buy AstraZeneca.

Corporate governance expert Charles Elson, of the University of Delaware, said inversions are "trouble" for the First State. Companies entertaining such decisions are weighing the value of incorporating here versus hundreds of millions of dollars in tax savings that ultimately benefit shareholders.

"We have to rethink our taxation scheme," said Elson, a University of Delaware professor. "We've put ourselves in significant competitive disadvantage. Banning them from moving isn't going to work. You're going to have to fix the tax differential. That's what's driving this."

Delaware Gov. Jack Markell said some lawmakers have expressed an interest in reducing corporate tax rates while encouraging companies to repatriate foreign profits. But it would be better for Congress to take a holistic view, he said.

"My view is that we really need to address the underlying problem that causes companies to choose to invert," he said. "The real way to do that is through broader corporate tax reform."

Moves by American corporations to lower their overall tax bills by relocating overseas have been controversial for decades. The American Jobs Creation Act of 2004 prohibited the maneuver if 80 percent or more of the shareholders of the new company would not be different from the owners of the original company.

Legislation proposed by two Michigan Democrats, Rep. Sander Levin and his brother Sen. Carl Levin, would tighten the rules and save an estimated $19.5 billion over 10 years. Treasury Secretary Jacob Lew wrote Congress last week urging "a new sense of economic patriotism," and supporting the legislation.

But a significant number of Republican lawmakers prefer to address the issue in the context of overhauling corporate tax laws.

House Ways and Means Committee Chairman Dave Camp, R-Mich., is pressing for a broad reform of corporate tax policy that would close loopholes and lower the current corporate tax rate of 35 percent.

"We've been down this road before, and we know companies will continue to do this as long as our tax rates remain the highest in the world," Camp said in a statement. "America cannot compete as long as our tax policy is so dysfunctional."

Sen. Orrin Hatch of Utah, ranking Republican on the Senate Finance Committee, is open to a short-term measure that would provide incentives for companies to remain headquartered in the U.S., but he opposes the Levin legislation or any other effort to make inversions more difficult legally.

"The idea of constructing a wall around U.S. multinational companies carries risks of adverse consequences, including making U.S.-based corporations enhanced targets for foreign takeovers, which will further erode our tax base," Hatch wrote Thursday in response to Lew's letter.

Contact Nicole Gaudiano at ngaudiano@gannett.com. Follow her on Twitter at www.twitter.com/ngaudiano.