Ireland-bound Eaton is latest to end US corporate citizenship

Mon May 21, 2012 7:38pm EDT

May 21 (Reuters) - Eaton Corp's purchase of electrical equipment maker Cooper Industries means another U.S. company will soon leave the United States in favor of relocating its headquarters to a foreign country with sharply lower taxes.

In the case of diversified industrial manufacturer Eaton , a complicated corporate structure will allow it to become part of an Irish corporation and enjoy that country's low 12.5 percent corporate tax rate.

The top U.S. corporate tax rate is 35 percent, the highest in the world, though few companies actually pay that much due to abundant loopholes that lower their effective rates.

The Eaton-Cooper deal comes as the U.S. Congress inches toward a broad corporate tax code overhaul. The deal could add momentum to that effort, with Republicans arguing that high U.S. tax rates can drive companies to drastic measures.

In what could be a painful drain on the Treasury over time, at least seven U.S. companies in recent months have chosen through acquisition or merger to renounce their U.S. corporate citizenship by relocating to Ireland, the Netherlands, Switzerland or other lower-tax countries.

"There have been more of these in the last two months than in the five years before," said Bob Willens, an independent tax analyst and publisher of The Willens Report.

The Eaton-Cooper deal will lead to $160 million in annual tax savings for the combined company, even though Eaton in practice already pays far less than 35 percent. That is thanks to its foreign subsidiaries, many of which are already in low-tax countries such as Luxembourg and the Cayman Islands.

Eaton Chief Executive Sandy Cutler told Reuters in an interview that synergies, not tax reduction, were the primary motivation for the deal. Still, it is clearly structured to ensure the joint company will be Irish.

Also headed overseas is Praxair Inc, which is purchasing Swiss company Tyco Flow and expects its tax rate to fall to between 24 and 26 percent from 30 percent as a re sult, according to its presentations to Wall Street analysts.

The spinoff of Sara Lee Corp's international coffee and tea business into a Netherlands-incorporated company will likely help the company's rate too. Dutch companies pay a tax rate of 20 percent. Last year Sara Lee paid an effective tax rate of 31 percent. A Dutch spokesman for Sara Lee could not be reached for comment on what the tax rate could be.

Both Praxair and Sara Lee have cited strategic benefits beyond a lowered tax rate.

Until recently U.S. companies were taking a different tack, actively lobbying for a tax holiday that would allow them to bring back to the United States at a lower tax rate some of the many billions of dollars they have parked overseas.

Untaxed foreign earnings among companies in the benchmark S&P 500 stock index rose to $237 billion in 2011 from $187 million in 2010, according to the Analyst's Accounting Observer, a research report that is well-read on Wall Street.

The lead lobbying group pushing for a corporate income tax repatriation holiday effort recently closed shop, however, and now companies seem to be looking for other options.

Cooper Industries, which Eaton is using as its ticket to Dublin, was a U.S. company itself until 2002 when it move to Bermuda. It was part of a wave of corporate relocations that sparked congressional legislation to try to stem the departures. In 2009, Cooper changed domicile a second time, to Ireland.

Willens said once a company's U.S. operations are under a foreign parent, there are ways to lower taxes on the income still earned in the United States. The U.S. operations will often pay a dividend to the foreign parent, for example. That creates a deduction against U.S. earnings that lowers taxes.

If that deduction is big enough, and results in a loss for the U.S. firm, the company could then bring earnings back to the United States that are sheltered by that loss. Deals like Eaton's are "sort of a self-help repatriation," Willens said.

A representative for the Republican-majority Ways and Means Committee of the U.S. House of Representatives called Eaton's move, "a stark reminder that having the highest corporate tax rate and an outdated system of taxation is sapping our competitiveness in the global marketplace."

The IRS declined to comment.