Comment by chollida1 | Hacker News Reader

Comment by chollida1 | Hacker News Reader

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There is an entire class of hedge fund who make their money by only investing in the stock of companies who are merging. This is called merger arb and this deal is a huge one.

Unfortunately it is about as uncertain as a deal can be due to concerns about the government not allow the merger.

For those of you who don't follow corporate mergers, there has been a trend recently of larger american based corporations doing mergers with smaller foreign companies to move their head quarters to another country where the corporate tax rate is lower, these are know as tax inversions.

Burger King famously recently merged with Canadian "icon?" Tim Hortons in an attempt to domicile the corporation in Canada to lower their tax rate.

This is only going to intensify and its corporations telling America that their corporate tax rates are too high.

The US has a tax rule specific to itself where by it taxes corps at 35% on profit no matter which country it was earned it. It does let companies deduct taxes paid to foreign governments but it leads to companies operating in a way to minimize their US taxes.

From the article linked at the bottom[0]:

> Pfizer takes in about 40 percent of its revenue from sales in the United States and 60 percent from foreign sales. Yet, according to its 2014 annual report, Pfizer had about $17 billion in pretax income from overseas, and almost a $5 billion pretax loss here in the United States. By shifting profits overseas, Pfizer pays relatively low cash taxes compared with the nominal United States tax rate of 35 percent. Instead, much of its American tax liability is illusory, taking the form of an obligation to pay taxes in the future if it repatriates cash to the United States.

This leads to companies jumping through hoops to shift earnings income around and to holding large chunks of cash off shore of the US.

This might be upsetting to some people who think corporations don't pay enough taxes but it's not going to go away. The world isn't going to get more protectionist, especially on the heals of TPP.

The US needs to deal with this.

[0]http://www.nytimes.com/2015/11/25/business/dealbook/why-pfiz...

I can't argue with their rationale or yours, but would be totally comfortable with Pfizer being barred from lobbying now, as a foreign corporation, plus being hit with import tariffs.

No reason US law has to open taxpayers to blatant exploitation by multinational corporations, who probably benefit more than anyone, from the US' unique combination of highly educated workforce, stable and for-sale political system, protective military, and millions upon millions of the most prolific, indiscriminate consumers in the world.

No reason the TPP has to open our taxpayers to blatant exploitation by US corporations who profit from US's protective military.

- The rest of the world.

Taxpayers aren't being exploited. The US just has a ridiculous tax policy, as the only western country in the world. How does it make sense to want to tax every single dollar, regardless of where it was earned? It makes total sense to do an inversion if you want to build a global company.

Stopping (or at least reducing the amount of) inversions is easy. Just lower the corporate tax rate to an acceptable level. Large companies who are not doing inversion deals are often leaving billions on the table.

I'm certainly not 100% onboard with current tax policy, but it makes some sense when much of the value of the product being sold worldwide is created by US-based designers. Apple, for example - a huge portion of their value is created by their design teams in CA, but they make a huge fraction of their profits from those products by selling overseas.

You can't identify with any accuracy where profit showed up.

R&D in country X, Y production in Y, Z sales in X, Y, Z, and A. Now, which country added profits.

Except instead of X, Y, Z, it's ~150+ countries.

Yep, which is why we have simplified assumptions like "we tax everything at x rate", where x rate is likely lower lower than if they were successful at separating out what profit was made where.

Presumably Apple's design teams are well paid to keep producing all that value they produce, and the income taxes are captured in the US.

True. I don't subscribe to the idea that salaries are proportional to the value they create, though.

Anyway, there are arguments to be made on both sides, and it's clearly not working very well.

> Just lower the corporate tax rate to an acceptable level.

Since the acceptable level is 0, this is a stupid suggestion.

The acceptable rate is that at which the accounting and legal cost of shuffling the company around for a tax break doesn't make sense.

That may be closer to zero than you'd like, but it's certainly more than zero.

Exactly this. If the US would have a similar tax rate and policy to Ireland, this merger might not have happened. Many of these transactions are happening because they deliver quick, untapped gains. You just need to unlock them by doing an inversion deal. Or in other words, even an overpriced deal pays for itself.

But that can only happen if the US has a defense forces[1] spending similar to Ireland.

[1] This is just the obvious example, include here any where that the US gov out spends the Irish.

> Stopping (or at least reducing the amount of) inversions is easy. Just lower the corporate tax rate to an acceptable level.

So give in to terrorist demands? No.

We institute duty on your products or services, we nullify your patents, we prohibit you access to the market. GTFO.

What's that? You don't like that? Buck up princess, government exists to protect its citizens, not your corporate profits.

The problem lies in the fact that the US is all about free trade. They don't want to do that. You can't have it both ways.

Situation one: I'm a US company, expanding abroad. I acquire foreign competitors, and build a global company. I'm taxed on every dollar (profit), since I'm a US (holding) company.

Situation two: I'm a European company, expanding abroad. I acquire a US competitor, and build a global company. Since I'm a foreign company with foreign shareholders, the US can't tax my global income (obviously)

This means a US company will be at a significant disadvantage to a UK/Swedish/Belgian company competing in the same market, because, even if their results are exactly the same, their after tax income will be significantly less.

This also means that a US company bidding for a US competitor will be able to pay less than a foreign company buying up US companies, because they can achieve less/lower (tax) synergies.

> government exists to protect its citizens, not your corporate profits.

That's how it should be. But from observation this seems not to be happening, at all.

I wonder if someone could mention any example from the last years where the US government has clearly chosen against corporate interests, and for protecting its citizens.

You want the consumer financial protection bureau: http://www.consumerfinance.gov/

This is the thing Elizabeth Warren spearheaded, and the Republicans have fought tooth-and-nail since before it existed.

That's how business is done in places like Russia and China and in many very poor countries. Displease the government and face the full force of state power regardless of actual laws.

I prefer being subject to laws and having recourse to a legal system where i am allowed to challenge even the behavior of the government.

Subjecting corporations to capricious bullying when they do something unpopular is not "protecting citizens" - governments that act like that invariably also abuse individuals the same way.

> That's how business is done in places like Russia and China and in many very poor countries. Displease the government and face the full force of state power regardless of actual laws.

Not at all. I'm suggesting the legislative process be used. You're inferring that trade protectionism is totalitarian rule. Seriously? Citizens and their quality of life is more important than you business and its profits. Full stop.

> I prefer being subject to laws and having recourse to a legal system where i am allowed to challenge even the behavior of the government.

But you are. If you operate in a country, you're subject to its laws. You have recourse under the legal system, and recourse for its legislation if you are a citizen and have a vote.

> Subjecting corporations to capricious bullying when they do something unpopular is not "protecting citizens" - governments that act like that invariably also abuse individuals the same way.

Today I learned that forcing companies to follow the spirit rather than the letter of the law is "bullying". Makes me found of how China and Russia do business sometimes.

It is not part of the legislative process in western liberal states to introduce laws that target specific named corporations or individuals separately to their peers.

This mechanism is sometimes used by totalitarian or very authoritarian regiemes as a form of window dressing to justify punishing corporations and individuals who displease the government. And of course these punishements are always justified by some appeal to "protecting citizens" - both Hitler and Stalin constantly used this as justification.

I like the fact that I live in a country where I can be punished for breaking actual laws not one where laws are vague or can be applied whimsically based on a notion of "spirit" or the intension of the drafter of the law instead of what the words of the law state.

> I like the fact that I live in a country where I can be punished for breaking actual laws not one where laws are vague or can be applied whimsically based on a notion of "spirit" or the intension of the drafter of the law instead of what the words of the law state.

Leave or do something to change the status quo. Those are your options.

Citizens and their quality of life is more important than you business and its profits

What do you think the mechanism for improving quality of life is? Trade.

Not all trade improves quality of life, as I'm sure you're aware.

Right, trade is neutral. Quality of life is a normative statement, however. The implication being that the state, as a centrally planning agent, is capable of calculating what will objectively increase or decrease QoL. Taken to its conclusion, we reach the spectacular failures of the Five-Year Plans and similar initiatives.

I'd say the US economy isn't centrally planned. I would also say existing tax policy is used to encourage certain behaviors. I'm suggested further tax policy to encourage other behaviors as well. I don't see the problem. Shareholder's don't get as high of a dividend? Because its not like Pfizer is going to be using those savings for R&D. Its either going into people's pockets or used to acquire competitors (which arguably does not help consumers or increase their quality of life).

Following your suggestion, go ahead and tax US corporations at a very high rate, they GTFO as you suggest, and now US citizens have to pay either for an inferior, generic low-priced drug, or a high-priced one imported by the very same, once-US-based corporation that also supplied jobs to US citizens that are now also exported overseas. What Pfizer does with its savings whether for R&D or not, is not yours or the government's business as long as they are not doing anything illegal with the profits. If they didn't invest in R&D or maintain competitiveness and their profit margins will go down. Eliminate any government subsidies and corruption that may enable them and other companies to escape market forces and it will take care of itself. Central planning - no thank you.

You're free to your opinion in the same way a government is free to not enforce any "intellectual property" rights a corporation may attempt to exert.

Of course, the cost of duty is ultimately offloaded to the same citizens you're supposed to be protecting.

Not to mention, the elephant in the room here is that no evasion is being performed, but avoidance. To equivocate the two would create a moral hazard that would also affect the same citizens you're supposed to be protecting.

Funny enough, a stroke of the legislative pen changes these activities from avoidance to evasion, no moral hazard required.

How? Corporate mergers appear to be an intrinsically available strategy for avoiding an extraterritorial corporate tax system. What intervention will your legislative pen impose?

> Corporate mergers appear to be an intrinsically available strategy for avoiding an extraterritorial corporate tax system.

...because of legislation and existing tax code allowing it.

> What intervention will your legislative pen impose?

I would have to speak with a legal associate with experience drafting legislation for specific language. The purposes would be to ensure any tax intended to specifically be avoided by a merger would be re-captured (this isn't out of the ordinary; the AMT in the US is specifically designed to disallow certain income tax deductions when a taxpayers income reaches a certain level, to prevent tax avoidance).

My understanding is that the Double Irish Arrangement "loophole" has been closed, but further work needs to be done.

So, the business purpose and economic substance doctrines. Again, flimsy normative statements. A legislative pen obsessed with maximizing such a function will eventually write things unsavory to civil liberties, as well.

So your solution is to make every merger with a foreign entity illegal?

Only if done primarily to avoid/evade taxes.

I'm not up to date on the details of US tax law, but I'd be surprised if such a general anti avoidance rule does not exist.

Mergers the size of this will always have genuine economic incentives in place to do the deal. Add to that very well paid lawyers who will put together an amazing story to get the deal through. So it won't stop them.

Also, this won't stop companies from being sold outright to a foreign competitor. If a Chinese company swoops in and buys the US company, these laws can not apply.

It seems like an easy problem to fix, but it's extremely complex.

If only the people in positions of power took this stance, we would be in a much better place today. What bothers me is that the merger between corporations and state through k-street and the revolving door/regulatory capture has become exceedingly rampant.

" The world isn't going to get more protectionist, especially on the heals of TPP."

Please remember that the TPP hasn't passed yet, and I don't think it should pass, so let's not treat it as a done deal yet. (even though you and I both know it will be a hard battle to win). Also, I think the world should be more protectionist...

This is the type of thing where I feel absolutely ashamed of how impotent the US is, despite its superpower status. I find it hard to believe that if we had Andrew Jackson as president today, and Ireland and Bermuda were allowing US companies to shield themselves from paying US taxes, that these tax inversions and avoidance schemes wouldn't be quickly and swiftly resolved with extreme prejudice. Ireland alone is costing the US maybe a hundred billion a year. Our relationship with them is not worth that much. Throw sanctions on them. Make Ireland pay taxes to the US. Don't recognize any IP of any Irish company. Threaten them with bombings. Do something. While it is a "problem" that the US has higher corporate tax rates, that's only an actual problem if the US lacks the will or power to enforce those higher tax rates. And the US has the power. And we look like a joke for letting little shit countries give companies back doors to our tax code.

It's also a reason why I think a defiant blowhard like Donald Trump could make waves as president. I don't think he'd have any problem dropping his sac to break treaties and crack skulls.

While I think the "bombing" hyperbole was a bit much, I do think you have a point there. Even if we accept the argument that corporate taxes in the US are too high, a tax which is unevenly enforced is effectively a tax on the honest and a subsidy for the dishonest. Facilitating such subterfuge - which several countries do quite openly and deliberately as a matter of policy - is just money laundering writ large. As with other money launderers, letting them get away with it is effectively giving them money from our own taxpayers' pockets. Instead, we should encourage them to help us collect our lawfully levied taxes, as we help them collect theirs. If they continue cooperating with criminals instead of with our government, sanctions from denial of IP to outright embargo (but not bombing) are entirely appropriate.

Bomb a western country because corporations - in full compliance with its laws and those of the US - are doing something you dont like? Really?

How about the US simply change its tax laws to prevent this happening?

Poe's law? Poe's law.

Nope. I'm just a man with beliefs that most people today would call antiquated.

Ok - can you elaborate why you so clearly favour aggression and blaming Ireland rather than simple domestic legislation and general political will to prevent these companies using other countries as tax havens?

Sure.

I like the logic of trying to close it with domestic legislation, but the US sucks at that. For one, congress and the president cannot ever seem to work together to get anything meaningful done. But secondly, every single time we think we make an exception or a rule in the tax code, we learn that crafty investment bankers figure out how to exploit the rule. As Plato said, "know thyself." And we suck at playing nicely.

Completely hypothetically, say we could kill tax inversions. The whole thing has felt like a game of cat and mouse game for a century now. Inversions are the tax-avoidance scheme du jouer. For example, for years, Pfizer has already been paying virtually no taxes in the US by storing all of its IP in an offshore subsidiary. The "double Irish" trick is being done by companies who have never done an inversion. There are all sorts of holes in the tax code that other nations use to fuck the US. And there's no way we can compete on the rate, since we'd be competing with countries that have a 0% rate. Many companies pay a zero percent corporate tax rate on all of their offshore profits (which, IIRC, is attributed to a subsidiary in Bermuda), and mostly claim to have nothing but losses to write off in the US.

We need to finally say, "fuck this nonsense." Companies don't need laws to inform them when they're acting morally. It is immoral to act the way they are, and instead of playing cat and mouse like we have been doing, we need to put our foot down and MAKE every company obey the spirit of the tax laws, and not the letter. And the only way I know of to make that happen is to use extreme threats like invalidating their IP if they pull these tricks, or threatening the countries that aid them.

Yeah, threatening them to take the action of banning US incorporation is a bit weird. Even Trump is about fining the company that wants to move to Mexico above the tax savings rather than getting Mexico to halt the deal.

Not antiquated at all. Protectionism has always been an integral part of U.S. economic policy since the beginning, though I don't think even ardent tariff and land law act proponents would have went as far as to threaten war on countries with more favorable business conditions (actually, the trend has been war on not being favorable enough, but otherwise retain strong domestic policies).

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