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Old 01-28-2014, 02:49 PM  
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Companies Fleeing Taxes Pay CEOs Extra as Law Backfires

http://www.bloomberg.com/news/2014-0...backfires.html

Ten years ago, Congress passed a law intended to penalize chief executive officers whose companies shift their legal addresses to tax havens.

It hasn’t worked out as planned. Companies have found ways around the law that create new rewards for executives. When Actavis Inc. (ACT) changed its incorporation to Ireland in October, the New Jersey-based drugmaker helped CEO Paul Bisaro avoid the law’s bite by handing him more than $40 million of stock as much as three years ahead of its schedule, then promising him an additional $5 million to remain with the company.

The payouts to executives highlight the ineffectiveness of the 2004 law, which contained a series of provisions aimed at reducing the tax benefits of reincorporating overseas. In the past two years, a fresh wave of companies has fled the U.S. system to avoid hundreds of millions of dollars in taxes.

The 2004 law has “clearly been a failure” in halting the tax exodus, said Edward Kleinbard, a professor at University of Southern California’s Gould School of Law. “And it now has the perverse result of putting money into executives’ pockets sooner.”

The law imposes a special tax of 15 percent on restricted stock and options held by the most senior executives when a company reincorporates outside the U.S. Since the measure took effect, at least seven large companies have disclosed in securities filings that they risked triggering the tax. All took steps to shield their executives from having to pay.

Tax Bill

Three of the companies’ boards simply picked up the tax bill for their executives, maintaining that the managers shouldn’t suffer for a decision that benefits shareholders.

At three other companies, including Actavis, the boards went a step further, helping them avoid the tax altogether by allowing restricted stock to vest early and for options to be exercised. Awarding the equity early raises the risk that the executives might quit or sell their shares, or get paid for meeting goals they never attain.


Since 2012, at least 13 large U.S. companies have announced or completed shifts of legal address, which tax experts call “inversions,” to lower-tax nations such as Ireland and Switzerland.

Omnicom Inc. (OMC), the New York advertising firm, estimates that a planned incorporation in the Netherlands this year, as part of a merger with a French rival, will save the combined company $80 million a year. The cost to the U.S. Treasury of the recent wave of address changes may be about $500 million a year, estimates Robert Willens, a New York-based tax and accounting consultant.

Tax Rate

The statutory U.S. corporate income tax rate of 35 percent is the highest among developed countries, although many companies end up paying less. Lawmakers in both parties and President Barack Obama have endorsed tax code changes that would lower the rate below 30 percent, reducing the incentive to reincorporate overseas. Those proposals have been stymied by disputes over details and what should happen to individual taxes.

Some Democratic lawmakers have introduced legislation that would treat companies managed from the U.S. as domestic even if they’re incorporated elsewhere. Carl Levin, a Michigan senator, said last year the change would raise tax revenue by $6.6 billion over 10 years. None of those bills have attracted much Republican support or emerged from committee.

Lawmakers Notice

An earlier flurry of corporate flights to tax havens triggered the 2004 law. Tyco International Ltd. of Exeter, New Hampshire; Chicago-based Fruit of the Loom Inc.; and Ingersoll-Rand Co., based in Woodcliff Lake, New Jersey, incorporated in Bermuda or the Cayman Islands in the late 1990s and early 2000s.

By the time Stanley Works, the 159-year-old Connecticut toolmaker, announced plans to use a Bermuda address in 2002, lawmakers took notice. They denounced the company’s CEO and proposed more than 30 different bills to curtail the practice. Connecticut’s attorney general sued, and union officials organized protests in the company’s hometown of New Britain.

“These expatriations aren’t illegal. But they’re sure immoral,” Charles Grassley of Iowa, then the top Republican on the Senate Finance Committee, said at the time. Stanley Works eventually dropped the Bermuda plan.

Grassley helped shepherd a series of anti-inversion measures into law in the American Jobs Creation Act of 2004. Some provisions made it harder for companies to get tax savings from incorporating abroad. Acquiring a mailbox in Bermuda was no longer enough.

Foreign Mergers

One route that remains available involves a foreign merger, as long as the partner is at least one-fourth the size of the U.S. firm. Most of the reincorporations since 2004 have been achieved through acquisitions abroad. They include Liberty Global Inc., the Englewood, Colorado-based cable operator, and Tower Group Inc., the New York-based insurer.

So many pharmaceutical companies are switching addresses that bankers are pitching takeovers of Irish drugmakers based on the tax benefits. Gregg Gilbert, a Bank of America Corp. drug analyst, dubbed it a “tax rate land grab.”

Another provision in the 2004 law imposed the penalty on CEOs. Since the mid-1990s, the Internal Revenue Service has required stockholders of some companies reincorporating abroad to recognize capital gains on the shares and pay income tax, even if they continue to hold the equity. That rule doesn’t apply to the restricted stock or unexercised options of executives, who technically don’t own the shares. Some lawmakers saw that as an unjustified boon for the CEOs.

Picking Pockets

“It is only fair for these executives, who are picking the pockets of the American taxpayer to the tune of $4 billion, to feel some of the pinch,” said Richard Neal, a Massachusetts Democrat, in a speech on the House floor in 2002.

Argonaut Group Inc., a niche insurer in San Antonio, Texas, was one of the first companies to face the new tax on executives’ equity awards. When it acquired a Bermuda address through an acquisition in 2007, Argonaut accelerated its top executives’ awards to avoid the tax, recording an estimated $10.5 million expense, according to a securities filing. Jazz Pharmaceuticals Inc. of Palo Alto, California, did the same for its executives when it shifted to Ireland through a 2012 merger. CEO Bruce Cozadd got $3.1 million ahead of schedule, a securities filing shows. Both companies declined to comment.

Applied Materials Inc. said on Jan. 21 that it would help Chairman Michael Splinter avoid the tax by granting him $23 million in stock awards ahead of schedule. The Santa Clara, California-based maker of computer-chip equipment plans to buy a Japanese company this year and incorporate in the Netherlands.

Executive Awards

Other top executives will get early vesting on only a portion of their equity and will have to pay taxes on the rest, the filing shows. Some will get extra cash bonuses. The company declined to comment beyond the filing.

Eaton Corp., the Cleveland-based manufacturer of electrical equipment, and Perrigo Co. (PRGO), the over-the-counter drugmaker based in Allegan, Michigan, opted to pay their executives’ tax bills instead.

The cost of these payments can add up because the payments themselves are subject to tax. The total expense was $11.5 million for Eaton’s CEO, A.M. “Sandy” Cutler, and an estimated $9.3 million for Perrigo’s Joseph Papa, according to securities filings. Both companies, which declined to comment, shifted their incorporation to Ireland through acquisitions.

Cost Savings

It’s easy to see why Eaton’s board decided the shift was justified even with the extra compensation cost. Cutler told analysts the Irish address would save $160 million a year because of “cash management and resultant tax benefits.”

The board of Endo Health Solutions Inc. (ENDP), a maker of painkillers in Malvern, Pennsylvania, weighed both options while making plans to acquire a new address in Ireland, the company said in a securities filing. The board opted to pay the tax, estimated at $7.8 million for CEO Rajiv De Silva, in part because “accelerating the vesting of these performance-based awards could result in unearned compensation being paid” if goals weren’t met. Endo declined to comment beyond the filing.

The biggest disclosed payout so far has been to Bisaro at Actavis.

After becoming CEO in 2007, the former lawyer embarked on a series of acquisitions, assembling one of the world’s largest generic drug companies. When bidding for foreign assets against rivals with lower tax rates, he said on a conference call last year, he felt “handicapped.”

Serial Acquirers

For instance, another serial acquirer, Valeant Pharmaceuticals International Inc., is incorporated in Canada and earns much of its profits through subsidiaries in havens such as Bermuda, achieving an effective tax rate of less than 10 percent. Before getting the Irish address last year, company officials said, Actavis’s effective rate was about 28 percent.

Bisaro found a solution last May when he announced the $5 billion acquisition of Warner Chilcott Plc, a smaller company that made birth control and acne treatments and was incorporated in Ireland. He estimated the total cost savings from the takeover at $400 million a year, including the tax savings from using the Irish address as well as job cuts and other operational changes. He said the combined company’s effective tax rate would be about 17 percent and eventually drop further. On its own, Warner Chilcott’s effective rate was about 11 percent to 12 percent.

Not that Bisaro was packing his bags for Dublin.

“Everybody loves New Jersey too much, so nobody’s willing to go,” Bisaro told analysts on a conference call announcing the deal.

Staying Put

In fact, Warner Chilcott’s top executive, Roger Boissonneault, wasn’t in Ireland either. Once an executive at New Jersey’s Warner-Lambert Co., Boissonneault became president of the Chilcott generics division when it spun off in 1996. In the intervening years, takeovers shifted Warner Chilcott’s ultimate corporate parent to Ireland, Northern Ireland, Bermuda, and back to Ireland. Boissonneault stayed put, leading the company from Rockaway, New Jersey.

“I didn’t have to travel far this morning,” Boissonneault told analysts when he visited Bisaro’s office to announce the deal. “Actavis is about five minutes away from our Warner Chilcott headquarters, a little bit further up on Route 80.”

Since becoming CEO, Bisaro has gotten the biggest chunk of his pay in the form of restricted stock, which doesn’t vest until as long as four years after it’s awarded. In the meantime, he can lose it if he misses performance targets or quits. In 2012, restricted stock made up about half of his $8.7 million in compensation.

Restrictions Dropped

Because of the special tax due upon reincorporation, Bisaro’s board decided to drop restrictions on Bisaro’s stock when the Warner Chilcott deal was completed -- even some that he’d gotten in March that wasn’t due to vest until 2017. Actavis estimated the value of that stock at $40 million in an August filing and said the total amount for the top five officers was $100.8 million. By the time the deal was completed, the stock had gained an additional 13 percent.

Directors reasoned that the executives shouldn’t have to pay a penalty for a transaction that was in the shareholders’ interest, Actavis said in the filing last year. The board chose to accelerate the executives’ stock awards rather than pay the 15 percent penalty because the former option was partly tax-deductible, the company said.

“It’s important to point out that this approach was overwhelmingly approved by the shareholders,” David Belian, a company spokesman, said in an e-mail. He declined to comment further and didn’t respond to a request to speak with Bisaro.

Unintended Consequences

The accelerated stock award triggered an early tax bill for Bisaro, who reported that about half the stock was withheld for tax purposes. Stock awarded as compensation is usually taxed at the same ordinary income rate as wages. Without the acceleration, he would have faced a similar tax bill in the future, whenever the restrictions lapsed.

The law is a classic example of how Congress’s attempts to tweak corporate behavior through the tax code usually backfire, said Kevin Murphy, a professor at USC’s Marshall School of Business who studies executive compensation. “One thing we can always count on is that there will be lots of unintended consequences -- usually costly -- for shareholders and for taxpayers.”

Besides rewarding CEOs for corporate tax avoidance, the accelerated payments may upend companies’ compensation plans, said Brian Foley, a consultant in White Plains, New York, who helps companies set pay. Restricted shares are designed to be earned over time. If officers can cash out their shares immediately, they may no longer have as much reason to stay at the company or contribute to its long-term success, he said.

Pickup Sticks

“I want him or her to have skin in the game,” Foley said. Without restrictions on equity awards, “they can pick up their sticks and leave, and they get to take all that vested stuff with them.”

Indeed, Actavis said last year that it would have to make additional payments to retain Bisaro and his team after allowing them to collect their shares ahead of schedule. Shortly after shifting its address to Ireland, Actavis promised Bisaro the $5 million cash retention bonus, contingent on his remaining at the company through 2016.

Congress should overhaul the whole corporate tax system rather than targeting address shifts, said Bret Wells, a professor at the University of Houston Law Center. U.S. rules allow foreign companies to dodge taxes on their American profits, a process called “earnings stripping,” more easily than domestic companies can, he said.

‘Wakeup Call’

“Inversion transactions should be a wakeup call,” Wells said. “They should tell us there’s something wrong with our tax system when it’s more valuable to be foreign-owned than U.S.- owned.”

Two months after Actavis announced the reincorporation to Ireland, Gilbert, the Bank of America analyst, asked on a conference call if Bisaro could comment on the “tax rate land grab that is going on.”

“Unfortunately we have a tax structure in the United States that’s putting companies in the U.S. at a disadvantage,” Bisaro said. “We won’t be at a disadvantage anymore. And I think other companies have to take a look at that. It just makes economic sense.”
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Old 01-28-2014, 10:19 PM   #46
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What are you talking about? Companies should be rewarded for their success. Not individuals. Why do people continue to defend the practice of executives squandering money and not investing it back into the company?
That is possibly the most amazingly stupid comments Ive read here. Are companies not led by people? Do people sell what companies do or make? Very strange idea you have.
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Old 01-28-2014, 10:27 PM   #47
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That is possibly the most amazingly stupid comments Ive read here. Are companies not led by people? Do people sell what companies do or make? Very strange idea you have.
Companies are made up of people. Not just one CEO. You don't see the ridiculousness that companies are taking advantage of a law to increase compensation for the executives, namely the CEO?

If this was about companies using the money to increase investment back into the company, that'd be one thing. There is some cost saving from paying more to an executive upfront, but let's be real about who this benefits. This benefits the company slightly, an executive majorly.
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Old 01-28-2014, 11:03 PM   #48
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The problem with feel-good legislation such as this is that it really isn't surprising when the many, MANY bright minds try REALLY hard, they can find a work-around that results in defeating the legislation and has other unintended consequences, which usually aren't good.
This is likely the take away of the article which I'm sure nobody will actually read.
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Old 01-29-2014, 08:42 AM   #49
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Originally Posted by suzzer99 View Post
http://hereandnow.wbur.org/2014/01/2...ome-inequality

Yeah successful people never worry about potential political unrest or their consumer base drying up. Genius as always with you.
Kind of a dumb article. Nobody's talking about "trickle down" at Davos, huh? Well that's because the people who generally talk about "trickle down" are the dopes who don't understand the economic ideas they're criticizing or the insatiable socialists who are looking for direct access to pockets that are deeper than their own.
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Old 01-29-2014, 08:49 AM   #50
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Originally Posted by chiefzilla1501 View Post
Companies are made up of people. Not just one CEO. You don't see the ridiculousness that companies are taking advantage of a law to increase compensation for the executives, namely the CEO?

If this was about companies using the money to increase investment back into the company, that'd be one thing. There is some cost saving from paying more to an executive upfront, but let's be real about who this benefits. This benefits the company slightly, an executive majorly.
You picked a weird thing to criticize in this thread.
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Old 01-29-2014, 08:50 AM   #51
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Once again your stupidity knows no limits.

Extreme levels of wealth inequality cause slow and inefficient economic growth. It makes things worse for everyone. If it continues unabated then it breeds instability within society.
Well, let's fact the FACTS--this outcome IS Obama's economic program, including his stimulus. This is the one you support so it's your program too! Then you call for more of the same. What's the definition of stupidity? Doing the same thing over again despite lack of results.

Once again your stupidity knows no limits. What's worse you project it onto others while you remain in DENIAL.


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Old 01-29-2014, 08:54 AM   #52
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Unbelievable that we have a party in this country that sees this practice as "hard work and success". They are evading taxes and making a killing doing so.


How much are you getting in student loans--so you can then make a killing as an arrogant doctor with an anti-social bed-side manner.


Ha! ha! Back at'cha twit.
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Old 01-29-2014, 08:57 AM   #53
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Gee, maybe instead of trying to punish businesses and people for trying to escaped the largest corporate tax rate in the world, maybe just maybe we should think about lowering the largest corporate tax rate in the world.

Might work better then taxing executives.
This is right. We should be trying to create a business climate that attracts businesses instead of driving them away.

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They've tried to lower it, which is stated in the article you didn't read.
Who is stopping them? The article is kind to President Obama by reporting that he has "endorsed" a lower rate, but what it doesn't tell you is that democrats including the President attach some pretty serious strings to those easy words. President Obama's corporate tax reform ideas always involve increased spending.
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Old 01-29-2014, 08:58 AM   #54
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The problem with feel-good legislation such as this is that it really isn't surprising when the many, MANY bright minds try REALLY hard, they can find a work-around that results in defeating the legislation and has other unintended consequences, which usually aren't good.

Nonetheless, increasing concentration of wealth (which isn't necessary the specific focus of this law) is an increasing problem. One that will be difficult to resolve.
No it isn't difficult to resolve. Removing false economic ideas aka control economics is the barrier, including seeing through the twisted definitions offered for capitalism or markets.

Our recovery started before Obama's stimulus went to effect. Using the FDR model has delayed any recovery and it's the elite politically-connected that are getting richer.
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Old 01-29-2014, 09:19 AM   #55
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You picked a weird thing to criticize in this thread.
I am a firm believer that the private sector is the engine of the economy. And so I favor tax breaks and less regulation. The problem is when greedy opportunists get tax breaks then pump that into executive compensation instead of building new plants, investing in systems, etc...

I'm fine with that happening for unincorporated businesses and small businesses. Many of those businesses have businesses that are a bad quarter away from bankruptcy. Corporations are funded by shareholders.

So yeah, when I hear that companies are getting better tax breaks, I would prefer to hear that they are using that money to improve their business and operation. I'm sorry if I'm not celebrating that it's often being used to line the pockets of executives.

If we had sensible exec compensation, I'd be ecstatic about this article.
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Old 01-29-2014, 09:22 AM   #56
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Originally Posted by chiefzilla1501 View Post
I am a firm believer that the private sector is the engine of the economy. And so I favor tax breaks and less regulation. The problem is when greedy opportunists get tax breaks then pump that into executive compensation instead of building new plants, investing in systems, etc...

I'm fine with that happening for unincorporated businesses and small businesses. Many of those businesses have businesses that are a bad quarter away from bankruptcy. Corporations are funded by shareholders.

So yeah, when I hear that companies are getting better tax breaks, I would prefer to hear that they are using that money to improve their business and operation. I'm sorry if I'm not celebrating that it's often being used to line the pockets of executives.

If we had sensible exec compensation, I'd be ecstatic about this article.
Companies compete for executives, and one of the ways they do that is through compensation. If you want to have top executives, you have to pay competitve salaries. If you want to pay executives for performance, you have to have incentives that are worthwhile compared to what else is being offered in the industry.

Leadership turnover is a huge obstacle and a huge expense.
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Old 01-29-2014, 09:27 AM   #57
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Originally Posted by chiefzilla1501 View Post
I am a firm believer that the private sector is the engine of the economy. And so I favor tax breaks and less regulation. The problem is when greedy opportunists get tax breaks then pump that into executive compensation instead of building new plants, investing in systems, etc...

I'm fine with that happening for unincorporated businesses and small businesses. Many of those businesses have businesses that are a bad quarter away from bankruptcy. Corporations are funded by shareholders.

So yeah, when I hear that companies are getting better tax breaks, I would prefer to hear that they are using that money to improve their business and operation. I'm sorry if I'm not celebrating that it's often being used to line the pockets of executives.

If we had sensible exec compensation, I'd be ecstatic about this article.

Some companies don't care to expand. They operate at a high level. They make a lot of money. And they use it as they see fit including rewarding whomever they choose in their company. Odd isn't it that they have such freedom to use their money how they want to. Rubbish. This needs to be regulated.
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Old 01-29-2014, 09:32 AM   #58
patteeu patteeu is offline
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Originally Posted by chiefzilla1501 View Post
I am a firm believer that the private sector is the engine of the economy. And so I favor tax breaks and less regulation. The problem is when greedy opportunists get tax breaks then pump that into executive compensation instead of building new plants, investing in systems, etc...

I'm fine with that happening for unincorporated businesses and small businesses. Many of those businesses have businesses that are a bad quarter away from bankruptcy. Corporations are funded by shareholders.

So yeah, when I hear that companies are getting better tax breaks, I would prefer to hear that they are using that money to improve their business and operation. I'm sorry if I'm not celebrating that it's often being used to line the pockets of executives.

If we had sensible exec compensation, I'd be ecstatic about this article.
In a thread about corporate inversions and tax measures gone wrong, you were side-tracked by your hangup with corporate management compensation. That's what my "weird" comment was about.

This CEO's compensation is a direct result of an attempt by our government to force behavior on corporations through the tax code. But for that ill conceived tax measure, the CEO wouldn't have received this windfall. But for the ill conceived corporate tax code, the CEO's company wouldn't have been looking for a way to get out of dodge.
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Old 01-29-2014, 09:37 AM   #59
WhawhaWhat WhawhaWhat is offline
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This is likely the take away of the article which I'm sure nobody will actually read.
Let's be honest... anything over 140 characters is a pain in the ass these days.
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Old 01-29-2014, 09:38 AM   #60
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Quote:
Originally Posted by patteeu View Post
In a thread about corporate inversions and tax measures gone wrong, you were side-tracked by your hangup with corporate management compensation. That's what my "weird" comment was about.

This CEO's compensation is a direct result of an attempt by our government to force behavior on corporations through the tax code. But for that ill conceived tax measure, the CEO wouldn't have received this windfall. But for the ill conceived corporate tax code, the CEO's company wouldn't have been looking for a way to get out of dodge.
Exactly!
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