Wednesday, June 2, 2010

Vertical Integration and Tax Avoidance

Vertical integration refers to the practice of a company buying a supplier (backward integration) or customer (forward integration). One of the motives for vertical integration is to avoid regulation, such as taxes. If a company has customers or suppliers located in countries with lower tax rates, it makes sense to purchase one of those companies in order to shift profits to the lower tax location.

Here's a really interesting story from Business Week on how one pharmaceutical company, Forest Laboratories, uses vertical integration to avoid taxes. As just one example, about 5 percent of the company's workers are located at its Irish facilities, yet around 70 percent of its 2009 sales were realized there (care to guess whether Ireland has high or low corporate taxes?). Follow the money as it visits the US, Ireland, the Netherlands, Bermuda, . . .

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