Minnesota Gov. Mark Dayton (pictured) received assurances from Medtronic Chairman and CEO Omar Ishrak that job creation would continue in the state where the company was founded, even as its domicile shifts to Ireland.

While cable TV watchers are transfixed this summer by border crossings by undocumented children, tax revenue watchers are more concerned by the brazen border jumping of grown-up companies.

Prefer a more pleasant metaphor? It is summer music festival time, so perhaps all the corporate ocean-hopping could go by a new name: Inversion-palooza.

Tax inversion, to be precise. Otherwise known as the tax-motivated company takeover, so that the newly merged entity can park its registered location and its money outside the US to avoid an onerous corporate tax burden. It’s not quite the same as the Bermuda-type tax shelter racket … but it’s close.

To continue the metaphor, the list of inversions and attempted inversions reads like a global life sciences stadium concert’s all-star lineup — some 20 in all, part of nearly 50 companies to move their address offshore. But while some road-weary musicians might start to think one town looks like another, Inversion Tour 2014 really does revisit the same venues. A quick review of the headliners:

• Pennsylvania-based Endo Pharmaceuticals bought Paladin Labs, meaning a new registration in Ireland, with operational headquarters still located in Malvern, Pa.
• Pfizer tried but failed to buy the UK’s AstraZeneca.
• Last month Minneapolis-based Medtronic Inc. announced a $42.9-billion takeover of Dublin-based Covidien Plc and plans to base the newly combined firm in Dublin. Covidien’s operating base, however, is in Mansfield, Mass.
• Earlier this week Mylan announced it would purchase Abbott Laboratories generics business and base it in the Netherlands.
• On July 18 an Abbott spinoff (since January 2013), AbbVie, finally announced a much-anticipated proposed takeover of Shire.

The newly merged entity, “New AbbVie” in the carefully worded documentation, would be based in Shire’s home base of Jersey in the UK. But oddly enough, Shire itself keeps a separate mailing address … at the Citywest Business Campus, in Dublin. The New AbbVie Group “would operate under a new holding company, New AbbVie, and would retain operational headquarters in Chicago, as well as a strong presence in the US and the UK,” say the documents.

Dr. Flemming Ornskov, the CEO of Shire, currently works out of Lexington, Mass., where the company a few years ago revamped a former Raytheon site for a new headquarters campus. Ornskov now will lead the integration on behalf of Shire and oversee the creation of a Rare Disease business unit within New AbbVie following completion of the transaction. He will be based in Switzerland.

AbbVie’s current corporate tax rate is 22 percent. As stated in today’s released documents, the AbbVie Board expects the transaction “to reduce New AbbVie’s effective tax rate to approximately 13 percent by 2016 and provide New AbbVie with access to its global cash flows.”

According to a Bloomberg report, “a congressional panel estimated this year that preventing future inversions would preserve $19.5 billion in otherwise [foregone] tax revenue over the next 10 years.”

The Stop Corporate Inversions Act of 2014, introduced by US Rep. Sander Levin (D-Mich.) in May, now sits with the House Ways and Means Committee. According to a bill summary, it would amend the IRS Code “to revise rules for the taxation of inverted corporations (i.e., U.S. corporations that acquire foreign companies to reincorporate in a foreign jurisdiction with income tax rates lower than the United States) to provide that a foreign corporation that acquires the properties of a U.S. corporation or partnership after May 8, 2014, shall be treated as an inverted corporation and thus subject to U.S. taxation if, after such acquisition: (1) it holds more than 50 percent of the stock of the new entity (expanded affiliated group), or (2) the management or control of the new entity occurs primarily within the United States and the new entity has significant domestic business activities.”

Life sciences giants do not get off easy in the Offshore Shell Games 2014 report released June 5 by the US Public Interest Research Group Education Fund (PIRG) and Citizens for Tax Justice. Pfizer operates 128 subsidiaries in tax havens and officially holds $69 billion in profits offshore for tax purposes, the third highest among the Fortune 500, claims the report. Pfizer recently unsuccessfully attempted to acquire UK-based AstraZeneca with the intent of reincorporating as a foreign company, in an increasingly common practice known as tax inversion. Successful inversions have come via Endo Pharmaceuticals’ purchase of Paladin Labs and re-registration in Ireland, and with this week’s purchase of Covidien Plc by Medtronic, which likewise aims to domicile the newly combined firm in Ireland.

According to charts in the PIRG report, life sciences companies with the most cash parked offshore include Pfizer (fourth overall, with $69 billion), Merck (fifth, with $57.1 billion), and Johnson & Johnson (seventh, with $50.9 billion). A little further down the list of the top 30 companies by cash offshore come Amgen (19th, $25.5 billion), Abbott (21st, $24 billion), Bristol-Myers Squibb (also with $24 billion), Eli Lilly ($23.7 billion) and Medtronic, with nearly $20.5 billion and 37 offshore subsidiaries … before the purchase of Covidien.

Sheep in Wolf’s Clothing

It all appears to be bad news for the US. But it might not be.

Corporate leaders continue to tout the proverbial synergies such mergers will produce. But it’s hard not to blurt out how great it is to be able to self-fund some of those new drug platforms and R&D with the capital they’ll finally be able to access under the new inverted structure.

“By combining AbbVie and Shire, we’re creating a unique, diversified biopharmaceutical company,” said Richard A. Gonzalez, Chairman of the Board and CEO of AbbVie. “The combined company would benefit from a best-in-class product development platform, a stronger pipeline and more enhanced R&D capabilities. The combination of AbbVie and Shire is attractive for shareholders of both companies, bringing the potential for strengthened sustainability of top-tier EPS growth, attractive free cash flow and enhanced cash returns to shareholders. The combination would provide us with enhanced access
to cash that we can use to expand our portfolio and fund M&A to supplement organic growth.”

Medtronic’s tax rate will remain about the same, but it can use more of the profits it makes outside the US to invest into business growth everywhere — including the US, where it was founded 65 years ago in Minnesota. The June deal prompted Minnesota Gov. Mark Dayton to issue the following statement:

“Medtronic’s Chairman and CEO, Mr. Omar Ishrak, informed me last night of his company’s plans to acquire an Irish company,” Dayton said on June 14. “As Governor of Minnesota, my primary concerns were this merger’s effects on the Minnesotans currently working at Medtronic, and its implications for the company’s continued growth here.

“During my conversation with Mr. Ishrak and in further discussions today between senior state and Medtronic officials, we were assured that the company intends to keep its operational headquarters here in Minnesota and that no jobs will be lost here due to this transaction. Company officials also told us that Medtronic intends to create over 1,000 new medical technology-related jobs in Minnesota during the next five years, in corporate management, research and development, engineering, and manufacturing. That is tremendous news for Minnesota and evidences the company’s continued commitment to our state.”

“Site Selection for Life Sciences Companies,” a report released this month by business intelligence firm Venture Valuation and KPMG, uses an agglomeration of other reports and proprietary data to analyze key decision factors relevant to the leading life sciences clusters in France, Germany, Ireland, the Netherlands, Switzerland and the UK.

Why those territories? The authors say those countries are often preferred by foreign companies seeking European or global headquarters. But depending on which factors are emphasized and how they’re weighted, any of the six might stand above the rest. For instance:

• The World Economic Forum’s Global Competitiveness Report and the Heritage Foundation’s Index of Economic freedom both rank Switzerland No. 1 in Europe.
• France competes strongly in the number of regional headquarters of non-domestic life sciences companies despite an average ranking in global competitiveness.
• Germany has the highest number of medical device companies and the largest life sciences work force in absolute numbers. It also ranks first in work-force productivity. “Germany and Switzerland have among the highest workforce productivity in the industrialized world, helping mitigate the comparatively short working hours per year in Germany or the high salaries in Switzerland,” say the authors.
• Ireland and France offer the lowest salaries among the six countries.
• The UK has the highest number of products in development, and also led all six nations in life sciences financings in 2012 with US$645 million. (The six selected countries account for more than 70 percent of European life science financing.)

The six countries evaluated in the study represent almost 60 percent of all the biotechnology companies and biotechnology therapeutics companies in Europe.

The countries examined basically encircle Belgium. Why wasn’t Belgium included?

“It was a matter of resources on our side for the first report, and Belgium does not have such a big biotech cluster,” says Patrik Frei, CEO of Venture Valuation. “We also concentrated on the locations companies would consider first.”

Frei says the UK’s leadership in financings stems in part from London’s strong financial services and venture capital platform.

“The number of financing rounds has increased, with companies on average receiving less money per round, absorbing management time and putting additional pressure on businesses to raise finance,” says the report. “Investment sources are increasingly moving away from classical venture capitalism financing to family offices, government funding and venture funds run by big pharmaceutical companies. Two of the five biggest rounds in the selected countries also included two biofuel companies (Gazasia and Brain), which show the overlap between life sciences and clean technology.”

Asked if the clusters tend to have a strong university scene nearby, Frei says, “Universities and availability of skilled students is essential. In the UK you have Oxford and Cambridge, in Switzerland, ETH/EPFL. This has certainly an impact on the cluster.”

Among other facts uncovered by the report:

• Germany and Switzerland offer the strongest key macroeconomic data, with low unemployement rates and positive current account balances.
• Amsterdam (Netherlands) and Dublin (Ireland) offer the most attractive cost of living, including rents.
• London’s airports offer the best direct flight connections to all major global life sciences hubs.
• Ireland and Switzerland offer particularly favorable tax environments for life sciences companies for all types of activities, but the the UK and the Netherlands appear to be closing the gap through the introduction of tax incentives on income from innovation-related activities.

Among the countries studied only the Netherlands showed a pronounced R&D focus for companies’ global and regional headquarters.

Germany has the most life sciences companies in absolute numbers. But the report’s authors dug deeper to look at niches such as biotechnology therapeutics. What they found is that the UK has the most companies in that sub-sector (180), followed by Germany (155) and France (151). The six countries together represent almost 60 percent of all the biotech and biotech therapeutics companies in Europe. The UK also leads in number of pharmaceutical companies, with 85, followed by Germany with 83.

Among the incentives highlighted in each country:

Netherlands

Employers engaged in certain R&D activities (“WBSO”) are entitled to a payroll tax reduction of 38 percent (in certain cases 50 percent) of the relevant payroll costs, up to a maximum base amount of €200,000, and 14 percent for any excess base (maximum reduction of €14 million). In addition, the R&D deduction (RDA) of 54 percent of the eligible cost and expenditure is available for investments in new business assets.

France

R&D tax credit of 30 percent for the portion of the R&D expenses below €100 million is available, reduced to 5 percent for the portion exceeding that amount. In addition, small and midsize innovative start-up companies (“JEI”) may benefit from a one-year corporate tax exemption and a 50-percent rebate for the following year.

Ireland

Ireland also provides a tax credit of 25 percent of capital and revenue expenditure on qualifying R&D expenditure. It is possible to claim excess R&D credits as a cash refund. Certain start-up companies are exempt from tax in each of their first 3 years.

Germany

Investment subsidies of 2.5 percent for investments started in 2013 in the former Eastern German areas, or regional subsidies as well as subsidies on European, Federal and State levels.

Switzerland

Accruals for future R&D projects executed by third parties are permitted in an amount of up to 10 percent of the taxable profit, maximum 1 million Swiss francs. Full or partial tax holidays of up to 10 years on cantonal and — in certain regions — federal tax level can be granted to substantial investment projects. In addition, funding in case of a collaboration between the company and a university may be available.

UK

Tax incentives for R&D expenditure are available, with an enhanced deduction of 130 percent for large companies and of 225 percent for small and midsized enterprises. From April 2013, an optional above-the-line R&D tax credit of 10 percent of qualifying expenditure is available for large companies. Twenty-four new enterprise zones have been set up in economically declining areas of the UK. Possible measures include a five-year holiday up to £275,000.