A Seedy Deal for Americans? Monsanto in Deal Talks with Chemical Giant Syngenta

Monsanto announced that it has resumed possible merger talks with Syngenta, a Swiss-based agricultural chemical giant. The pair explored a merger in early 2014 before deciding against it.

When the 2014 talks were going on, one of the principle attractions for the deal was the possibility of Monsanto buying Syngenta and then reincorporating as a Swiss corporation. By taking Syngenta’s Swiss corporate registration for the new company, in a process known as corporate inversion, Monsanto could dramatically reduce the taxes it pays in the U.S.

Since the 2014 merger talks were suspended, the rules governing corporate inversions by U.S. multinational corporations have tightened. After Walgreen’s proposed corporate inversion deal with Boots plc, Britain’s largest drug retailer, collapsed in the face of public condemnation, the Obama Administration announced new rules designed to thwart future corporate inversions.

New U.S. anti-inversion rules slow—but don’t stop – new inversions.

In December, followed by another heated public protest, Burger King completed it corporate inversion with Tim Horton’s, Canada’s largest donut shop. The new corporation, Restaurant Brands International, is a Canadian corporation. It is still too early to fully understand whether or not the merger is generating significant tax savings for the combined corporations.

Costs associated with the merger and restructuring of the two companies caused Restaurant Brands International to report losses in its most recent fiscal year. The new company, paid CAD$25.9 million in income taxes to Canada (up from $500,000 the previous year) while U.S. income tax payments declined by 46 percent to CAD$16.1 million last year.

Will Monsanto use corporate inversion to dodge U.S. taxes?

In its last year, Monsanto paid $648 million in federal income taxes on U.S. pre-tax income of $2.4 billion, an effective tax rate of 26.6 percent. In contrast, Syngenta, headquartered in Switzerland, a nation widely regarded as one of the world’s leading tax haven nations, reported an effective tax rate of 14 percent to its shareholders. In addition, Monsanto reported that it held $4.4 billion of profits offshore. Monsanto could owe as much as $1.5 billion in U.S. taxes on these offshore profits, an amount that could be permanently avoided if the new company engages in complex legal and tax transactions following an inversion.

One of the key provisions of the U.S. Treasury’s anti-inversion rules requires previous owners of the U.S. entity to own less than 80 percent of the new entity. This rule works well in preventing U.S. giants from buying much smaller foreign firms principally to access their tax advantages. Given that Monsanto and Syngenta are of a similar size (Monsanto is two-thirds larger than Syngenta),  Treasury’s ownership restriction would not have much teeth.

Policy actions can stop corporate inversions.

The Stop Corporate Inversion Act (S.198, H.R. 415), was reintroduced in the Senate, by Sens Dick Durbin (D-IL) and Jack Reed (D-RI) and in the House by Reps Sandy Levin (D-MI) and Lloyd Doggett (D-TX) in January. If enacted, it would save the U.S. Treasury nearly $34 billion over the next decade.

The Pay What You Owe Before You Go Act, introduced in the last Congress by Sen Sherrod Brown (D-OH) would require inverted companies to pay all unpaid taxes on their offshore profits, before moving their corporate registration out of the United States to another nation.  Corporations may have options.  But so do we.  

To Learn More:

Corporate Inversions: A “Get Out of Taxes Free” Card