Friday, September 16, 2016

Q.: Will President Obama's Closing Of Yet Another US Corporate Tax Loophole Impact Merck's US Effective Tax Rate?

Yesterday, the US Treasury issued a statement finalizing the closing of the so called tax "splitters" loophole.

In short, the IRS rules used to permit US based companies to take a partial credit (against their US tax liabilities) on the taxes paid to foreign tax authorities, for income earned there -- without regard to whether those companies actually returned the foreign earnings to US soil in cash (and paid the repatriation taxes here). As one might imagine, many, many byzantine exceptions and qualifiers applied to that rule. [Just a bit of our 2013 era coverage of this meta-narrative -- on taxation of behemoth global companies -- is available under that link.]

Reading Merck's last two definitive SEC filings on the matter, it is not possible to discern whether Kenilworth took advantage of the so-called "splitting" rules, to lower its US tax rate. We do know that Apple has done so -- and is now concerned about how its Irish tax penalty fight will play out under this new US Treasury rule. That is, Apple may not get the benefit of having paid those lower Irish taxes, unless it pays the EU mandated higher rates, now in full (in order to claim a partial credit here in the US, for unrepatriated foreign earnings).

We will have to watch and see whether Merck and Pfizer and the other biotech- and pharma- (and tech-) majors are in a similar position now -- as a result of the closing of the Treasury "splitters" provision. Here's Reuters on it:

. . . .Acting shortly after a European Union grab for billions of dollars in back taxes from Apple, the U.S. Treasury said it was tightening restrictions on companies' use of foreign tax credits to reduce what they owe in U.S. taxes.

"We are closing another tax loophole that contributes to the erosion of our tax base," Treasury Assistant Secretary for Tax Policy Mark Mazur said in a statement.

The fight for multinational tax revenues escalated on Aug. 30 when the EU ruled Ireland was giving improper state aid to Apple in the form of a deal for low taxes. The EU ordered Apple to pay Ireland 13 billion euros ($14.6 billion) in back taxes, prompting U.S. Treasury Secretary Jack Lew to express concern the EU ruling could undermine the U.S. tax base.

Analysts have speculated whether Apple would be able to cut its U.S. tax bill by claiming foreign tax credits for its extra tax bill in Ireland.

Under normal circumstances, U.S. companies can reduce the taxes they owe the U.S. government by the value of the tax credits they claim for taxes paid abroad on foreign profits. No U.S. tax is due on those profits until they are brought into the United States, or repatriated.

The new rule will prevent companies faced with back tax bills from "splitting," a strategy that allows companies to bring foreign tax credits into the United States without repatriating the income from which they were derived. . . .

We will, of course, keep a weather eye on the horizon on this, as Merck likely now (as of Q3 2016) has over $70 billion parked overseas. Whoosh -- a busy weekend ahead! With huge overnight smiles, as my Cubbies have now clinched -- and and a fond remembrance of four years, now-passed. . . . grin worthy, indeed.


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