The reports of my death have been greatly exaggerated.
In July, we summarized the issue of companies acquiring other companies in tax-friendly countries. These so-called “inversions” were not a new phenomenon, but their interest (at least in our industry) reached a fevered pitch this year.
Can This Continue?
This was a question we asked in July.
According to the Obama administration, the answer is a decisive “No.”
The Obama administration’s move to tighten rules on corporate inversions should discourage new deals, at least for a while, by making them harder and less profitable, tax experts said. On Tuesday it already was roiling some pending transactions.
Note that the move is designed to make these transactions more difficult, but not impossible.
It’s unlikely that large pending deals (such as AbbVie/Shire) will fall through, simply because a) the breakup fee is likely to be high, and b) it will be an embarrassment to management who originally touted “long-term, strategic value” or some other such MBA-speak.
As with anything surrounding the tax codes, there are an infinite number of interpretations and nuances. Witness, for example, the effect on “hopscotch” loans:
The rules, which apply to deals that close starting today, include a prohibition on “hopscotch” loans that let companies access foreign cash without paying U.S. taxes, and impose new curbs on actions that companies can use to make such transactions qualify for favorable tax treatment.
The fundamental problem with all this is that international companies quickly outgrow the confines of their national tax codes. Companies such as AbbVie and Pfizer and IBM are no longer “American” companies. They are global companies. Until tax codes recognize this, there will always be smart accountants and attorneys who delve into the tax codes and find novel ways to reduce the tax obligations of their clients.
In fact, early comments suggest that these new changes to the tax code will be largely ineffective:
These new Treasury regulations are likely to act like administering antibiotics to a sick patient. It will kill off the deals that were designed to comply with old rules, but new deals will quickly sprout up that are even more resistant to regulation. Investors have clearly lost their squeamishness at owning a company that is organized under Canadian, Dutch or Irish law. So long as U.S. corporate tax rates are so much higher than those in competing nations, there will always be a strong financial incentive for U.S.-based multinationals to figure out a way to move their corporate citizenship overseas.
We believe this issue will remain a continual source of income for international tax attorneys and accountants for a long, long time.