As Endo acquires Par Pharma, is there an end in sight to “inversion” advantage?

American pharmaceutical companies that moved overseas, before the U.S. Treasury stopped the tactic, continue to reap great benefits through acquisitions and tax savings. The Wall Street Journal reports that Endo International will soon acquire Par Pharmaceutical Holdings for $8 billion. Endo is one of several pharmaceutical companies that relocated their headquarters from the U.S. to overseas, in this case, Ireland. According to the Journal, Endo, and their ilk, are “using their lower-tax foreign addresses as springboards for acquisitions in the U.S.,” steering tax revenue away from the U.S. in the process.

This practice of American companies moving their legal addresses overseas and then acquiring firms in the U.S., saving millions in U.S. taxes, is known as “inversion.”  Last year the Treasury moved to stop these maneuvers but not before several American pharmaceuticals packed their bags, including Actavis, PLC and Valeant Pharmaceuticals International Inc. The prohibition to “invert” imposed by the Treasury did not affect these companies since they were already gone. Since leaving, these companies have taken over more than $125 billion in U.S. assets, according to FactSet.

This virtual permission that these pharmaceuticals have to “invert,” since later Treasury regulations did not apply to them, represents an important advantage over their competition, domiciled in the United States. According to the Journal, the U.S. has one of the highest corporate tax rates in the developed world.

The Journal reports that “two factors drive the tax arbitrage:” “First, the combined U.S. state and federal corporate tax rate is the highest in the developed world. Second, the U.S. taxes all profits of its companies, no matter where those profits are earned. Most other governments only tax profits earned in-country, which gives global firms based outside the U.S. wide leeway to minimize their tax bills.”

While the majority of U.S. firms are unable to “invert” due to new Treasury regulations, Endo and company plan to continue to reap the benefits of their early exit from the U.S. tax market.

“[Rajiv De Silva, CEO of Endo,] a former deputy of Valeant CEO Michael Pearson, another health-care M&A enthusiast, doesn’t appear to be done buying. In a written statement Monday, he said the Par deal creates ‘a powerful corporate platform for future growth and strategic M&A,’ according to the Journal.

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