Lately, more and more West Michigan companies are looking at leaving West Michigan. Not physically – their buildings and factories are still here. But through a legal loophole called a “tax inversion,” businesses can merge with or purchase an overseas company and move their headquarters to a place like Ireland or the Netherlands, where business taxes are far lower than the United States. In just the past few years, Perrigo, Stryker and Pfizer have all talked about (or actually pursued) a tax inversion. Western Michigan University international finance professor Christopher Korth says these moves aren't good for the country, but unless we change our tax code, tax inversions won't stop.
Korth explains that businesses, like Perrigo, have moved their headquarters to a tax-friendly country like Ireland or the Netherlands through a legal loophole in the tax code. That allows them to save millions (or even billions) of tax dollars. Korth says economists and politicians on both sides of the aisle aren't fans, as it means the United States loses out on billions in revenue, but for now, there's no stop to the practice.
"Again, this is one of these holes in U.S. law that is preferential to big companies, and that small companies can't take advantage of," Korth says. "We have some 77,000 in the U.S. Internal Revenue Code. You know, the whole Bible is about 1,400 pages. Now picture 55 Bibles side-by-side. That's the size of the U.S. Revenue Code, and I don't think anyone has read the whole thing!"
Companies with a significant West Michigan presence have talked about pursuing a tax inversion in recent years. Allegan-based Perrigo moved its headquarters in 2013. Kalamazoo-based Stryker talked about a move last year, and most recently, Pfizer is looking at a merger with the Irish company Allergan.
While Pfizer CEO Ian Read has openly spoken about the tax burden his company faces in the United States, Korth says the company has already managed to avoid billions of dollars in taxes through many loopholes.
"Pfizer has accumulated almost $90 billion (in profits)...outside the U.S.," he says. "It's never been taxed by the U.S. government. And it won't be until those profits are brought back to the U.S. And it almost certainly will never be brought back. These loopholes are big enough to drive a semi truck through."
But Korth also says that a company moving overseas has some downsides. He says we've seen that recently, as Perrigo faced a hostile takeover attempt from the pharmaceutical company Mylan.
Korth says that by moving its headquarters overseas, a business loses an added layer of security from the United States Department of Justice. Korth says this exact situation happened to Mylan after a takeover attempt from another company, Teva, just this year.
"The Justice Department would have to approve a foreign pharmaceutical company taking over an American one. But if it's a Dutch pharmaceutical company, the U.S. government would typically wash its hands," Korth says. "That's a problem for the Dutch to decide. And that's what Perrigo and Mylan have perceived, is there were some extra advantages to being truly American companies.