Ditching The U.S. For Lower Taxes Doesn’t Always Pay Off

A beach on Grand Cayman, one of several popular tax havens CREDIT: AP
A beach on Grand Cayman, one of several popular tax havens CREDIT: AP

Over the past three decades, 76 companies have moved their headquarters overseas to avoid paying U.S. taxes even if they keep their operations here. But the move, meant to lower their tax bills, doesn’t correlate with better performance, an analysis by Reuters found.

Companies often sell these deals, called inversions because they move headquarters to a location with a smaller tax rate while leaving larger operations in the U.S., as benefiting shareholders. But when Reuters looked at 52 completed deals over the last thirty years, 19 under-performed as compared to the Standard & Poor’s 500 stock index, while 19 outperformed. Ten were bought by other companies, three went out of business, and one moved back to the U.S.

The disconnect between seeking these deals and getting higher performance can be seen in the oilfield companies that pioneered the move. McDermott International was the first to do an inversion in 1983 to Panama and has lagged the S&P; 500 by 85 percent. The same is true for Rowan Cos, lagging by 35 percent, and Transocean Ltd, by 18 percent. Most of these companies also underperformed as compared to indexes tracking just companies in their industry.

The analysis doesn’t imply any correlation indicating that an inversion will lead to bad performance. But, as author Kevin Drawbaugh notes, “the analysis makes one thing clear: inversions, on their own, despite largely providing the tax savings that companies seek, are no guarantee of superior returns for investors.”

Even so, the pace of these deals have sped up in recent years. Of the 52 that Reuters looked at since 1983, 22 have happened since 2008 and 10 more could be on the way. Of the 76 on a list compiled by the Congressional Research Service over the last three decades, more than half have occurred since 2008. Some high-profile deals expected to happen are drug company Pfizer acquiring AztraZeneca to save the company $1 billion in U.S. taxes every year, Adderall maker AbbVie buying Ireland-based Shire, and Chiquita banana merging with Irish competitor Fyffes. About a dozen companies have already made these deals this year, and overall they cost between $30 billion to $90 billion in lost tax revenues.

Yet beyond the evidence that these deals might not actually pay off, public pressure has also ramped up against them, from the public to the White House. That pressure is part of what led Walgreens to ditch its plans to buy Switzerland-based Alliance Boots and move its headquarters there, deciding instead to stay located in Illinois.

There is little evidence generally to suggest that lower taxes lead to better company performance. There is no evidence that higher corporate tax rates are associated with lower economic growth, while there is evidence that the companies that pay the highest tax rates create the most jobs while those that pay the lowest rates actually shed them.