Wednesday, May 22, 2013

Merck Should Be Preparing Contingency Plans -- For Other Means Of Generating "No- or Low-Tax" Transfer Pricing/Licensing, On Its Intellectual Property

An Irish minister just "played the soft part, loudly" -- on multinational corporate tax gamesmanship (see quote, below -- uttered midday time in Dublin -- very early in our morning hours, on the east coast). It is clear that this is going to become a larger problem for Merck, GE, Pfizer, Lilly, HP and Intel -- just to name a few. Yep -- today, the ministry-level official tasked with encouraging multi-nationals to locate on the Emerald Isle called for an end to the aggressive gaming of the "stateless" corporate structure, for taxation purposes.

[By the way, a few days ago, I said I'd (at some point) get into how Merck's use of intellectual property transfers (primarily off-shore licensing of the patents, and know how, related to its drug compounds and molecules, but increasingly, on the brand names' registered trademarks, as well) differed from Apple's. Consider this to be that post.]

As a result of some sharp questioning before Congress, we all learned yesterday that Apple does essentially the same thing Merck does. And to be fair, Pfizer, and Abbott and Baxter and Lilly and HP and Intel all do it, too. That is, Apple has caused ownership of its patents and know how, on its tech products, to reside in companies set up in Ireland. So, we may quibble about whether Tim Cook is engaging in sophistry when he declares Apple uses no "tax gimmicks", but it is now certain that Mr. Cook's company uses almost every one of the same structures (gimmicky or not so) the multinational pharmaceutical companies use, to minimize their tax payments in high rate jurisdictions like the United States, and shift profits to low rate jurisdictions like Ireland, and parts of the Carribean.

I'd look for PhRMA to shortly come out, from behind the Oz-curtain, and make a pronouncement supporting reform -- corporate tax reform -- that would reduce the incentive for this sort of maneuvering. It seems that Apple has been a stalking horse for pharma, right along. Because Apple's gagets are so widely-adored, it was thought by PhRMA, Apple would have a better chance of getting through Congress or the White House, on a lowered tax rate mantra. Mean old evil pharma was long-known to have no such possibility -- not even remotely so.

Afterall, pharma would certainly like to have easier access to all its retained cash earnings, worldwide, at some overall lowered tax rate. And that will be exactly what the conjectured, but likely coming PhRMA white paper will ultimately angle toward -- though quite completely silently -- like a shark, in the deep, azure, open oceans. Watch for it in 3... 2... 1...

We will keep you posted -- but as several of these companies execute the (i) parent-only obligor debt issuance, followed by the (ii) super-sized stock buyback and (iii) debt repayment strategies across the globe, they will have a reduced near term need for an outright tax holiday, on repatriating overseas earning,s to the US. Why? Because they are acheiving much the same thing, in these three step transactions -- without having to get Congress or the President involved.

From AppleInsider, then:

. . . .The minister in charge of attracting foreign companies to Ireland is now saying that those companies need to be brought under control, according to Reuters.

"They play the tax codes one against the other," Richard Bruton told Irish state broadcaster RTE, "and I think we do need international cooperation through the [Organization for Economic Cooperation and Development] to deal with the aggressive nature of that."

Ireland has long drawn criticism from other European nations for its low corporate tax rate of 12.5 percent. That tax rate encourages companies to locate at least some operations in Ireland for tax purposes, which is what Apple does, along with Google and Yahoo, Pfizer, and Intel, as well as many others. Of Ireland's two million-strong labor force, about 150,000 work for foreign companies headquartered there for tax purposes. . . .
It seems that the antiseptic effect of. . . sunshine. . . is starting to take hold -- even in my cousins' government, on the Emerald Isle. Having said all of that, I do support a simplification of the US tax code applicable to multinational corporations. We could easily take away the vast incentives to engage in this sort of gamesmanship, and have a no-deductions, straight-ahead tax on corporations' profits (Tim Cook even said so!). But, more on that -- some other day.

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