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Taxes Cause US Corporations to Flee

ts-3High corporate taxes the U.S. government is levying against companies are triggering a mass exodus of U.S. corporations to avoid the nation’s 35% corporate tax rate. Some corporations are even considering mergers with European counterparts so they can move headquarters to nations with lower tax rates.

The latest is New York-based Pfizer Inc. (NYSE: PFE). The drug giant’s $98.7 billion takeover bid for Britain’s AstroZeneca is a “tax shelter” to reduce the American corporations tax rate to a much lower 20% in the United Kingdom.

The timing of the AstroZeneca deal seems to be no coincidence as the company reported a 15% drop in profits. The deal is so important to Pfizer that CEO Ian Read flew to London to try to talk Her Majesty’s Government into approving the deal. British observers are afraid that Pfizer will only use London as a business address for tax purposes and do most of its business in the U.S.

A series of other major corporations are also making plans to move abroad for tax reasons. Walgreen Co. (NYSE: WAG) had to go to some lengths to dispel rumors that it was planning to move its headquarters from the Chicago suburb of Deerfield, Ill. to Switzerland. Speculation of a move to Switzerland started after Walgreen bought 45% of European drugstore operator Alliance Boots GmbH in 2012. Alliance Boots’ headquarters is located in Switzerland. Tax experts say Walgreen’s could reduce its $1.1 billion income tax bill 30% moving to Europe.

At least three other major US corporations, Eaton Corp., Perrigo Co. and Actavis PLC have moved their legal headquarters to Dublin, Ireland to reduce corporate taxes. All three will cut their corporate taxes $100 million a year based on current operating revenues moving to Ireland. ts-2The changes are part of a legal shift called a tax inversion. The move usually sees corporations merge or buy another corporation in a country with lower tax rates to reduce the company’s corporate tax basis, shifting legal headquarters to the country with a lower corporate tax rate. The U. S. has one of the highest corporate tax rates in the world. But after special tax breaks are given to many corporations through loop-holes, corporate taxes in some cases are about the same as countries with lower tax rates.

For other corporations, the move can save companies a lot of money, but it can be a public relations nightmare as Walgreen’s found out. The drugstore chain’s CEO, Greg Wasson, went out of his way to say that his company was not planning to move during an earnings conference call after it received a mountain of criticism following the company’s announcement that it was buying the Switzerland chain. The actions demonstrate public resentment over international efforts to reduce corporate taxes at a time when many companies are battling to survive in a troubled economy.

Efforts to reduce corporate taxes are also likely to become a political issue in the upcoming mid-term elections. Critics of the tax code and opponents of high U.S. personal income taxes are likely to jump on them as a political issue. Naturally, many politicians will use these efforts as a reason to bash corporations since at least one thing becomes abundantly clear: America’s tax system is in urgent need of reform. Changes are needed if we want to stop more large corporations from moving out of the country.

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