With 55 Fortune 500 companies accumulating savings worth more than the combined annual state budgets of California, Virginia and Indiana in taxes by booking profit offshore, it is no surprise that deals with "tax inversion" potential, like Stryker's possible buyout of Smith & Nephew, are the talk of the town.
Medtronic ($MDT), Abbott Laboratories ($ABT) and Johnson & Johnson ($JNJ) hold a total of $95 billion offshore, the study Offshore Shell Games by U.S. PIRG and Citizens for Tax Justice reveals. Each of the device companies ranks among the top 30 companies with the most money held offshore.
Thermo Fisher Scientific ($TMO) ranks fifth in tax avoidance, judging by the number of its tax haven subsidiaries (144), behind financial giants Bank of America and Morgan Stanley. Other device companies in the comprehensive list of corporations with the most money held offshore include industrial conglomerate General Electric ($110 billion), Baxter ($12.2 billion), Boston Scientific ($11.9 billion), Danaher ($10.6 billion) and Stryker ($7 billion).
Companies offshore profits to avoid paying the U.S. corporate income tax of 35%, one of the highest rates in the world. The study estimates that the tax rate on profits booked offshore is 6.7%, or sometimes lower, as in the case of Baxter, which pays an estimated tax rate of 3.9% on profits booked offshore.
The corporate lobby has called for lowering the tax rate to encourage investment in the U.S., but the Senate determined that more than half of offshore funds are reinvested back in the U.S, says the study.
Pfizer ($PFE) CEO Ian Read put the offshoring of profits in the public spotlight by citing tax savings as one of the three pillars of his failed bid for the U.K.'s AstraZeneca ($AZN), angering some congressional Democrats. Pfizer reports $69 billion in offshore profits for tax purposes, the study says.
Meanwhile, American device companies Medtronic and Stryker ($SYK) are reportedly interested in U.K. orthopedics company Smith & Nephew ($SNN), though tax inversion would be only a small part of the attraction. The U.K.'s corporate tax rate is 21% and set to fall to 20% in 2015.
Politicians have debated cutting the corporate tax rate, but reform has been held up due to congressional squabbling. President Obama wants to cut the tax rate, but also eliminate domestic corporate tax loopholes.
"Strategically, we do have this current problem that we have a lot of cash outside the U.S.," Medtronic CEO Omar Ishrak said to Bloomberg. "We encourage some kind of U.S. tax reform that allows us access to that cash in a more reasonable way."
- read the study
- read the Bloomberg article