US ‘tax inversion’ deals skew Ireland’s FDI numbers

OECD report suggests investment by Irish firms abroad hit $75 billion in first-half of 2015

A spate of so-called "tax inversion" deals involving companies based in Ireland appears to be distorting the country's foreign direct investment (FDI) numbers.

An OECD report, published yesterday, suggests investment by Irish firms abroad more than doubled to $75 billion in the first half of 2015.

The study links the unusually large outflow to a $51 billion flight in equity capital in the pharmaceutical sector.

Two large mergers involving entities with Irish headquarters occurred during the six-month period.

US botox maker Allergan transferred its headquarters to Ireland through a reverse takeover of Irish-based drug maker Actavis, in a deal worth $66 billion. Similarly, US industry giant Medtronic moved to Ireland through a merger with rival Covidien in a tie-up estimated to be worth $48 billion.

Both deals were captured in the OECD’s report as outgoing Irish investment, as they involved a significant transfer of shares from the US companies.

Shift profits

So-called tax inversion deals allow a company to shift profits to the lowest tax jurisdiction in a merger. They are usually structured in a way to make the smaller entity look like the bigger takeover party.

The OECD told The Irish Times that foreign investment flows reflected changes in ownership of assets, based on residency.

A crackdown by the Obama administration on tax inversion deals does not seem to have stemmed to tide, with several high-profile foreign takeovers of American companies announced this year.

Trading in shares of Allergan and drug giant Pfizer were this week suspended after Allergan confirmed it had been approached by Pfizer about a possible merger.

The OECD’s report suggests global FDI flows in the first half of 2015 increased by 13 per cent to $883 billion compared to the second half of 2014 . FDI inflows into the 34 OECD member countries, which includes flows between OECD states, more than doubled to $368 billion in the first quarter of 2015, then dropped by 47 per cent in the second quarter to $196 billion.

Nonetheless, they remained above the levels observed in all quarters of 2013 and 2014, the OECD said.

The strong first quarter was largely due to record levels of FDI inflows in the US in the first quarter, which equated to $200 billion, of which $86 billion was in the chemical sector and $81 billion was in the “other manufacturing” sector.

The OECD said the US inflow related to a number of large deals involving Luxembourg SPEs (special purpose entities) being used in the acquisitions of US companies. SPEs are typically used by multinationals to avoid paying tax in their home jurisdictions.

The report indicated FDI flows received by other major OECD recipients were stable in the first half of 2015, with the UK at about $40 billion, Australia at about $24 billion and Ireland at about $23 billion.