Tags: Buffett | Congress | tax | inversion

Buffet: Congress Will Likely Act on Tax Inversion in Mergers

By    |   Monday, 05 May 2014 10:56 AM

A lot of merger activity is now being spurred by U.S. companies' desire to acquire foreign companies, in part so they can change their official base to overseas, thereby avoiding hefty U.S. taxes.

The process is called inversion, and legendary investor Warren Buffett, CEO of Berkshire Hathaway, tells CNBC that Congress is "likely to address" the issue.

Asked about drug giant Pfizer's effort to buy AstraZeneca of the United Kingdom, partly to reduce its tax bill, Buffett believes the trend "will gather momentum, and my guess is that when you get to companies of this size, of this prominence, and with the speedup of momentum, Congress, one way or another, addresses this."

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But it's unclear whether Congress would act to encourage or discourage the practice, he notes. It's possible that the issue "forces them [Congress] to rethink all corporate
taxes. . . . This whole thing, I think, will cause one hell of a fight in corporate America."

Ideally, all companies should pay the same tax rate, Buffett argues, adding that Berkshire has no intention to domicile itself overseas to reduce its tax obligation.

The top U.S. corporate tax rate is 35 percent.

"We do not feel that we are unduly burdened by federal income taxes," he explains. "But it does get a little annoying when we see other people paying far lower tax rates while engaging in the same sorts of businesses that we engage in."

Berkshire had no problems when it faced a 52 percent tax rate, and "we make a lot of money under U.S. tax rates" now, he adds.

Buffett sees no need to cut corporate tax rates to aid U.S. companies against foreign competitors that have lower tax rates. "If you look at corporate taxes as a percentage of GDP since World War II, they've come down from 4 percent to . . . under 2 percent. . . . [U.S.] corporations aren't having any trouble competing."

Buffett defends several of Berkshire's shareholdings. At General Motors, CEO Mary Barra is handling the automaker's recall situation well. She's in a "hot seat, but not a hot seat of her own making," he states.

Meanwhile, Bank of America's $4 billion accounting snafu is no big deal. CEO Brian Moynihan is "doing a terrific job," he professes. The bank "has a wonderful deposit franchise, and it will do well over time."

Buffett also compliments Amazon.com, whose stock Berkshire apparently doesn't own, and its CEO Jeff Bezos. "It's one of the most powerful models I've seen in a lifetime," Buffett praised.

Morningstar analyst R.J. Hottovy is bullish on Amazon, though he acknowledges the company faces risks. "Amazon's growth potential is undeniable," he writes on Morningstar.com.

"Nevertheless, based on operating margins of 1 percent in 2013, . . . our fair value estimate seemingly requires a leap of faith on whether the company will be able to monetize its explosive growth."

That fair value estimate totals $400 a share. Amazon's traded at $307.13 Monday morning.

Editor’s Note: Retire 10 Years Earlier With These 4 Stocks

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A lot of merger activity is now being spurred by U.S. companies' desire to acquire foreign companies, in part so they can change their official base to overseas, thereby avoiding hefty U.S. taxes.
Buffett, Congress, tax, inversion
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2014-56-05
Monday, 05 May 2014 10:56 AM
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