Health Care Deal Is Latest to Seek Corporate Tax Shelter Abroad

Corporate inversions keep on coming as American companies seek ways to avoid paying high taxes.

On Tuesday, Endo Health Solutions, a pharmaceuticals company based in Malvern, Pa., said it would pay $1.6 billion for Paladin Labs, a smaller Canadian drug maker.

But instead of settling in either the United States or Canada, the combined company will be based in Ireland, a move likely to save it at least $50 million a year in taxes.

The deal is the latest so-called inversion, and comes amid a flurry of cross-border deals designed to extract profitable American companies from a more onerous U.S. tax regime.

In Endo’s case, moving to Ireland will lower the company’s effective tax rate to 20 percent, from its current rate of 28 percent, leading to at least $50 million in annual tax savings. With time, those savings could grow, according to analysts.

“We believe there will be additional tax opportunity over time,” Chris Schott, an analyst with JPMorgan Chase, wrote in a research note. “As Endo’s portfolio evolves and the company adds additional assets to its mix, we expect this 20 percent rate to move lower.”

To accomplish the inversion, Endo first had to identify a foreign target that it could buy using more than 20 percent of its own stock. Meeting that 20 percent threshold allows U.S. companies to legally reincorporate in a new country, escaping the American corporate tax rate of 35 percent, which is the highest in the world.

Endo will now set up a new company, called New Endo, in Ireland. The old Endo and Paladin will then each exchange their shares for stock in the new company, thereby allowing it to take advantage of Ireland’s significantly lower corporate tax rate.

On a conference call with analysts, Endo’s chief executive, Rajiv De Silva was remarkably forthright about the motivations behind the move.

“The concept here is a inversion that is enabled by the fact that we are acquiring a company which will end up having more than 20 percent of the shares of the combined Newco, which then allows us to invert into another geography,” he said.

Investors cheered the deal, sending Endo stock up 29 percent on Tuesday, a remarkable bump under any circumstance. That added about $1.4 billion to Endo’s market value, nearly as much as the price it paid for Paladin.

Several big U.S. companies have achieved inversions this year by buying foreign targets. Before Endo, the most recent was Silicon Valley’s Applied Materials, which acquired Tokyo Electron and intends to set up a new parent company in the Netherlands. The move could save Applied $100 million a year.

Pharmaceuticals companies have been among the most eager to invert, especially when they can redomicile in Ireland.

In July, drugmaker Perrigo, based in Allegan, Mich., paid $6.7 billion for Elan, an Irish drug company. Perrigo will now be based in Dublin, and save an estimated $150 million a year.

Actavis, based in Parsippany, N.J., bought Dublin-based Warner Chilcott earlier this year, and will move to Ireland, leading to about $150 million in savings over two years.

Inversions have been political lightning rods for more than a decade, with politicians assailing them as clever ways for U.S. companies to avoid paying their fair share of taxes. And while successive rounds of regulation have made it harder for companies to invert, today inversions can still be accomplished through cross-border deals.

But with about 40 percent of all inversions coming in the last year and a half, according to corporate tax adviser Robert Willens, they are once again under scrutiny by lawmakers.

Last week Sen. Max Baucus, Democrat of Montana, spoke out against inversions in Washington, after The New York Times published an article highlighting the trend.

“Mergers resulting in U.S. companies being owned by companies in tax-haven jurisdictions â€" like Ireland, Bermuda, or the Cayman Islands â€" are a new spin on the old ‘inversion’ problem,” said Mr. Baucus. “And it’s becoming an increasingly popular practice.”

The Senate Finance Committee, of which Mr. Baucus is the chairman, and the House Ways and Means Committee are both working on draft legislation for comprehensive tax reform. Though specifics are scant at this point, their proposals are likely to suggest lowering the 35 percent statutory tax rate, while trying to close loopholes such as inversions.

“When U.S. companies look abroad, they see other countries with more modern, efficient, competitive tax codes. Then they reincorporate overseas by acquiring or merging with another business,” Mr. Baucus said last week.

“They are not necessarily breaking laws,” he continued. “In fact, many of these companies are following the rules of America’s outdated, overly-complicated tax code. But the United States is losing hundreds of millions in revenue as a result. Even worse, when headquarters move abroad, good-paying jobs often move too.”

For now, however, inversions are likely to continue apace.

“The flavor du jour is for companies to acquire Irish companies for this reason,” Liav Abraham, an analyst with Citigroup, said in an interview, speaking about the Endo deal. “It’s a trend that we’re seeing across the industry.”

What’s more, once Endo completes its inversion, it could become a target for a still larger U.S. pharmaceutical company looking to invert, according to one person involved in the deal.

“A $7 billion company that has already inverted can be interesting to a $20 billion company that is looking to do the same,” this person said. “There’s the potential for this stuff to start small and snowball over time.”