Are "Inversions" Turning Your SSO Upside Down?

You’ll have heard a lot about corporate "inversions" in the last few days. That is because there is suddenly a wave of US companies buying up smaller, overseas competitors and reincorporating there, to save money on taxes. The FT, earlier this year, even described this trend as "the Irish inversion" (and included a clever Infographic to illustrate the flow of revenues, costs, and tax), citing Ireland’s 12.5% corporate tax rate. In the past few months, the wave of inversion-driven acquisitions by US companies include: Medtronic buying Covidien; Mylan buying Abbott Laboratories; and AbbVie is currently in talks to acquire Irish drug maker Shire (announced just this week). And while Pfizer’s planned takeover of AstraZeneca failed, earlier today, the Wall Street Journal’s web site reported that Walgreens was considering a similar move regarding Alliance Boots GmbH, which operates a U.K. drugstore chain and is based in Switzerland. These deals are interesting in that they allow US companies to pay significantly lower taxes on income earned outside the US, by incorporating abroad, through the (often much smaller) acquisition. Compare and contrast Ireland’s corporate tax rate of 12.5% and the US’s of 35%. Unsurprisingly this has caused some anxious stirrings in the US Administration, with President Obama urging Congressional leaders to act quickly to close the loophole and keep taxes onshore. Reforms being discussed include changes to business tax, for example by bringing US levels down to the 20%-range. The President’s budget presented to Congress earlier this year also included a provision that would have closed this loophole for US companies. Flying somewhat under the radar is the impact of this kind of re-arranging on Shared Services. In the days of yore, we used to talk a lot about Commissionaire structures (here’s an article dating back to 2000), which enabled transfer pricings that proved interesting to a parent company seeking to lower its tax exposure. Today’s inversions are a more sophisticated interpretation of the same idea. John Gregory, GBS – Global Finance Lead at Kellogg's, explains it this way: "Companies have been taking advantage of these kinds of ideas for a while – inversions just offer a way for a large company to, relatively neatly, back into an existing Euro-domiciled company. By putting a few significant senior positions in low tax jurisdictions like Switzerland or Ireland, and then, within the Shared Services model, placing the rest of the back office and even elements of the front office in an offshore SSO/GBS/COE, organizations can take advantage of transfer pricing to lower their tax obligations. In its pure, Commissionaire, form the in-country operations are just sales offices. Shared Services enable these transactions, whereby process and transparency become critical." From a Shared Services perspective, as David O'Sullivan, co-founder of Chazey Partners, told me, this means that at the very least, "folks will need to start getting their house in order" to deal with the repercussions of such a shift. Graham Russel, Head of BPO at WPP sees two advantages that Shared Services would deliver to such a move: "Firstly, as the effective tax rate reduces, the after tax savings from initiatives like Shared Services improve, perhaps leading to increased demand. And secondly, the Shared Services organization will prove to be a huge enabler to such inversions, given that all records are in one or few places, and changes are more easily handled than from multiple individual countries." We may be hearing more about this… Question: What does "corporate Inversion" mean for Shared Services? Have your say – either in the comments section below (you’ll need to register with Discus first which takes 30 seconds, and it really is quite cool in that it makes subsequent posting and tracking so easy) or via my discussion on LinkedIn. [inlinead]

Are "Inversions" Turning Your SSO Upside Down?

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