Practical analysis for investment professionals
31 July 2014

Weekend Reads for Investors: Taxing Matters

Posted In: Weekend Reads

Earlier this year, when US pharmaceutical giant Pfizer (PFE) proposed its acquisition of British drug firm AstraZeneca (AZN), it intended to reincorporate in the United Kingdom through a legal maneuver known as inversion. Pfizer’s bid was ultimately rebuffed by AstraZeneca but it did serve to call attention to the accelerating trend of US corporations looking to redomicile in order to lower their tax bill. The rise of inversions may say as much about the lack of opportunities for growth that companies see as it does about the burdensome US tax code or the cleverness of investment bankers and accountants.

The US has the highest corporate tax rate — 35% — in the developed world, and it also stands out because it is one of the few countries in the world that tax overseas profits after they have been repatriated. And while the US tax code has enough loopholes to enable corporate behemoths like General Electric (GE) and Verizon (VZ) to lower their effective tax rates to 0% in recent years, it remains uncompetitive for firms without an army of accountants.

The economy’s anemic recovery has induced US firms to resort to unprecedented acts of financial engineering, including debt-fueled share repurchases, to goose earnings per share. Inversions are another arrow in the financial engineering quiver — a way for management to wring more profits out of a stagnant top line. In a world where capital is cheap and plentiful, it is disheartening to see stock buybacks and inversions become the driving force behind higher corporate profits rather than reinvestment and innovation.

Not unexpectedly, politicians have joined the fray, with some calling inversions “unpatriotic” and promoting legislation to end or discourage the practice through tax reform. Until they do, or until we see a meaningful and sustained economic advance, expect to hear about more inversions.

Below are some other stories that caught my eye in recent weeks.

Strategic Thinking

Valuation

Economics

Big Business

High Profiles

In Memoriam

The Lighter Side


Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

Photo credit: ©iStockphoto.com/JLGutierrez

About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

1 thought on “Weekend Reads for Investors: Taxing Matters”

  1. Michael says:

    Good points here. These are all examples of valuing the American corporations themselves vs the American people.

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