Ireland-bound Eaton in Cooper buyout to save on taxes

American energy company Eaton’s decision to buy Cooper Industries and place the combined company’s headquarters in Cooper’s Irish home instead of Eaton’s Cleveland, will save $160m (€125m) a year in taxes by 2016, the firms have said.

The move, announced yesterday, underscores the tax disincentives for multinational firms organised in the US, said Gary Clyde Hufbauer of the Peterson Institute for International Economics in Washington. “The US tax system just invites this,” he said. “Any tax adviser in his right mind for this kind of thing would suggest: Locate the new company abroad.”

The US has the industrialised world’s highest statutory corporate tax rate at 35%.

US-based firms must pay taxes when they repatriate profits earned outside the country. Ireland has a top corporate tax rate of 12.5%.

US president Barack Obama and Republican lawmakers want to lower the statutory corporate tax rate by removing many breaks that allow companies to have effective tax rates lower than 35%.

Eaton is a maker of industrial equipment with $16bn in revenue in 2011. Eaton shareholders will own 73% of the combined firm.

“Incorporating as an Irish company provides significant global cash management flexibility and associated financial benefits,” the companies said in announcing the $11.8bn transaction, which is expected to close in the second half of this year.

Eaton’s effective tax rate for 2011 was 12.9% and its rate for 2010 was 9.5%. In 2011, lower taxes on its non-US operations made up more than half of the difference between its effective tax rate and the 35% top US rate.

Eaton also benefited from the research and development tax credit and the foreign tax credit. As of the end of 2011, it had $6.4bn in profits it earned outside the US that have not been taxed because they are invested overseas.

Cooper, which makes electrical distribution equipment, was a US company before a 2002 transaction moved it to Bermuda. In 2009, the company moved to Ireland.

The moves by Cooper and other companies led the US Congress to make it more difficult to carry out corporate inversions in which a US company ends up operating as part of a foreign-owned company.

The Obama administration has proposed preventing firms from deducting the cost of relocating. Congress is yet to act on the idea.

Bloomberg


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