All summer, Washington has been in a tizzy over mergers between U.S. companies and offshore rivals where the merged company incorporates outside the U.S. to avoid corporate income taxes. The U.S. taxes corporate profits at a top 35% rate while Ireland, to pick one popular destination, charges only 12.5%.
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To the left, these kinds of mergers are the latest sign of the 1% cashing in on the rest of us. To the right, they're a sign U.S. tax rates are too high, although effective U.S. corporate taxes are close to the developed-nation average because of more generous deductions.
Let's take the politics out of it for a moment. What investors need to know is that inversion deals are a tiny share of the merger market -- a whopping total of 10 inversions have been completed since 2011, according to Thomson Reuters. Only seven involved companies worth $1 billion or more -- and only 16 inversion deals that large have even been proposed.
If the rules are tightened by Congress, the likeliest proposals will affect even fewer deals because some will still qualify. For most companies driving the merger boom, the strategic and business rationales for the deals were the point before and will be the point after any change in policy.
In other words, if you're inclined to place merger bets, bet away.
In the first half of 2014, the dollar volume of mergers hit a seven-year high, driven by a relatively small number of very large deals. Thomson Reuters reports $1.46 trillion worth of U.S. deal announcements through Sept. 9, with deals like the $48.5 billion AT&T (T) -DirecTV (DTV) merger, Time Warner Cable (TWC) -Comcast (CMCSA) and Facebook's (FB) acquisition of WhatsApp near the top of the list. In all, there have been 49 deals U.S. worth $5 billion or more. For much of the year, the low end of the market has slowed down slightly, with more than 18,000 deals overall.
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None of this happened because taxes were cut on inversion deals -- they've been the same since 2004. Neither was there any big movement to raise them before the announcement of a half-dozen deals this year kicked off Washington's furor.
There are three big reasons why the legislationTreasury Secretary Jack Lew is urging will change little.