Suddenly, two successful U.S. corporations Burger King and Valeant Pharmaceuticals Inc. have announced their “inversion plans” to buy Canadian companies and move their seller’s base to Canada in order to keep from paying U.S. tax rates. The question is whether this is legal tax avoidance or illegal tax evasion. Burger King is seeking to buy the Canadian coffee and donut chain Tim Hortons Inc.
By moving to the lower tax jurisdiction, the inversion deals allow the companies to save money on foreign earnings and the moneys kept abroad.
Valeant Pharmaceuticals International Inc. which was based in California, combined with Canada’s Biovail Corporation and re-located to Canada, now paying a 5% tax rate.
Before the 2010 merger, Valeant profits were largely subject to the US federal income tax rate of 35 per cent. Biovail, by comparison, reported an effective tax rate as low as 7 per cent. For the last three years Valeant has paid an effective tax rate of between 3 and 5 per cent, even though around half of the group’s revenues came from the US, which is the world’s largest drug market.
The Canadian company was notified by the IRS in the second quarter of this year that it has commenced an audit of the Valeant US consolidated group for its 2011 and 2012 tax years.
Valeant said “all standard audits are disclosed in our SEC filings. We are not aware of any other investigations”.
A person familiar with the situation said that the difference in Valeant and Biovail’s tax rates may simply reflect the basis on which they were calculated.
Biovail’s chief executive was also based in Barbados, to satisfy a concept in international tax law that the appropriate management and control takes place in the jurisdiction where taxes are levied.
Biovail was renamed Valeant after the merger, and is run by Michael Pearson, the former US company’s chief executive who is based in New Jersey. A subordinate was appointed to run the Barbados subsidiary until the company’s intellectual property was relocated to Bermuda in 2012, then Luxembourg the following year.
A number of U.S. companies have changed their headquarters to Ireland for its low tax rates. In addition to the IRS investigations, Congress is considering passing laws to make inversions illegal as there is widespread concern that these actions are eroding our tax base.
Jeffrey Newman represents whistleblowers.