Obama goes public on tax inversion loophole

President Barack Obama has made a public pledge to close the tax loophole that allows corporations to avoid paying US corporate taxes by taking over companies in other countries.

The White House devoted the President's last weekly address to the issue, with Obama referring to "a small but growing group of big corporations [which] are fleeing the country to get out of paying taxes."

Describing companies adopting the practice - known as tax inversion - as "unpatriotic" and "renouncing their citizenship", the President said they were effectively sticking the US taxpayer "with the tab for what they stash offshore."

While some commentators believe closure of the loophole will not take place unless it is in the context of broader tax reform in the US, Obama suggested earlier intervention via specific anti-inversion legislation may be on the cards.

"Stopping companies from renouncing their citizenship just to get out of paying their fair share of taxes is something that cannot wait," he said.

A proposed fix for the loophole was however proposed in the US budget earlier this year - which would prevent companies from changing their tax domicile without a change in ownership of the company itself - has so far has been unable to garner bipartisan support.

Some big pharma companies appear to be defiant in the face of the political pressure to be economically patriotic, with Pfizer chief executive Ian Read telling the Financial Times that the company would continue to pursue inversion deals while it is still legal to do so.

Pfizer is among a number of big companies lobbying for sweeping changes to the tax system - including a whopping 35 per cent corporation tax rate - which they claim places US firms at a significant disadvantage compared to overseas competitors.

At the other end of the scale, Ireland's 12.5 per cent tax rate is making it an attractive location for US companies seeking to domicile overseas for tax reasons, but the number of deals taking place is raising alarm bells there too.

There is growing concern these transactions could lead to the country being perceived as a tax haven, which could discourage large companies from setting up there for fear of damaging their reputations and make life increasingly difficult for the country within the EU, where there are perennial rumblings that its singular tax structure is poaching investment from other countries.

Nevertheless, the list of deals which include a tax inversion component continues to grow. Pfizer said the prospect of placing revenues out of reach of the US tax system was a big draw for its currently stalled £69 billion takeover of AstraZeneca (AZ), and it is widely expected to come back to the table when the moratorium period for doing so under UK tax takeover laws expires in November.

The largest inversion example to date is AbbVie's recent £32 billion agreement to acquire Shire, but the list of transactions in pharma with tax-targeting dimension is getting rather long, featuring companies such as Mylan, Medtronic, Endo Pharmaceuticals, Perrigo, Actavis, Alkermes, Jazz Pharmaceuticals and Forest Laboratories, amongst others.

It is also a driver for Valeant's hostile takeover bid for Allergan, which has said it will relocate some revenues to Ireland if the deal goes through.

The completed inversions are estimated to have cut the average tax burden of the companies involved from a range of 25 to 30 per cent to between 15 and 20 per cent.

Merck & Co - with a tax rate of around 25 per cent at the moment - seems to be bucking the inversion trend, however, with chief executive Ken Frazier telling investors on its second-quarter results call yesterday that it was not looking for either a large-scale merger or an inversion deal, rather was interested in bolt-on acquisitions that would bolster its pipeline.

"Our strategy is built on innovation in the pipeline and so from our perspective that's what we're focusing on," he said.