Eaton Corp. (ETN:US)’s decision to buy Cooper Industries Plc (CBE:US) and place the combined company’s headquarters in Cooper’s Ireland instead of Eaton’s Cleveland home will save $160 million a year in taxes by 2016, the companies said.
The move, announced today, underscores the tax disincentives for multinational companies organized in the U.S., said Gary Clyde Hufbauer, a senior fellow at the Peterson Institute for International Economics in Washington.
“The U.S. tax system just invites this,” said Hufbauer, a former deputy assistant secretary at the Treasury Department. “Any tax adviser in his right mind for this kind of thing would suggest: Locate the new company abroad.”
The U.S. has the industrialized world’s highest statutory corporate tax rate at 35 percent. U.S.-based companies must pay taxes when they repatriate profits earned outside the country. Ireland has a top corporate tax rate of 12.5 percent.
President Barack Obama and Republican lawmakers in Congress want to lower the statutory corporate tax rate by removing many breaks that allow companies to have effective tax rates lower than 35 percent.
Eaton is a maker of industrial equipment with $16 billion in revenue in 2011. Eaton shareholders will own 73 percent of the combined company, which may be known as Eaton Global Corporation Plc although the name may change, said the companies’ announcement.
‘Cash Management Flexibility’
“Incorporating as an Irish company provides significant global cash management flexibility and associated financial benefits,” the companies said in announcing the $11.8 billion transaction, which is expected to close in the second half of 2012.
Eaton’s effective tax rate for 2011 was 12.9 percent and its rate for 2010 was 9.5 percent, according to company filings (ETN:US). In 2011, lower taxes on its non-U.S. operations made up more than half of the difference between the company’s effective tax rate and the 35 percent top U.S. rate.
The company also benefited from the research and development tax credit and the foreign tax credit. As of the end of 2011, Eaton had $6.4 billion in profits it earned outside the U.S. that haven’t been taxed because they remain invested overseas, according to the filings.
Cooper, which makes electrical-distribution equipment, was a U.S. company before a 2002 transaction moved the headquarters to Bermuda. In 2009, the company moved from Bermuda to Ireland.
The moves by Cooper and other companies such as Ingersoll- Rand Plc prompted Congress to make it more difficult to carry out corporate inversions in which a U.S. company ends up operating as part of a foreign-owned company. In 2002, Senator Charles Grassley of Iowa, then the top Republican on the Finance Committee, called such transactions immoral.
The Obama administration has proposed preventing companies from deducting the cost of moving operations outside this country. Congress hasn’t acted on that idea.
Based on 2011 sales, the combined companies in the deal announced today had 49 percent of their sales in the U.S.
Eaton probably will borrow in the U.S. to take advantage of interest deductions against the 35 percent rate on its U.S. earnings, said David Rosenbloom, an international tax attorney at Caplin & Drysdale in Washington.
“Congress seems to be just peachy keen with that,” he said.
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