July 21 --U.S. companies are racing to complete tax-reducing
offshore mergers before a credible threat to stop them emerges from
AbbVie Inc., maker of the arthritis medicine Humira, announced the
largest such inversion deal July 18 with a plan to move its tax home
to the U.K. in a $55 billion purchase of Shire Plc. It joins seven
other companies, including Medtronic Inc., with pending deals that
would be unwound, renegotiated or penalized under plans from the Obama
administration and Congress to make tax changes retroactive to
Each deal puts additional pressure on lawmakers to act while making
it more disruptive if they change the rules retroactively. Democrats
want to stop U.S. companies from moving their addresses abroad through
purchases of smaller businesses overseas. Republicans have resisted,
labeling such proposals punitive and porous.
“As more deals get announced and expectations are created and
expenses are incurred to move these deals along, it becomes harder and
harder to hold to that May effective date,” said Robert Willens,
a corporate tax consultant in New York. “The bankers and the
lawyers are telling them that, 'Hey, the sooner you announce this
thing, the greater the chances are that the deal will go through as
you intend.' ”
Still, companies including Medtronic and Salix Pharmaceuticals Ltd.
are including contingencies that allow them to back out if Congress
acts unexpectedly, showing how crucial the tax ramifications are to
such deals. AbbVie and Shire don't have such a clause in their
No corporate inversion deal has closed since May 8, when Senate
Finance Chairman Ron Wyden (D-Ore.) wrote an opinion piece in the Wall
Street Journal intended to mark that day as the effective date for
anti-inversion legislation (S. 2360) that he wants to pass.
Wyden, who had first said he wanted to wait to address inversions
as part of a broader tax-code revamp, said July 16 that he is
exploring near-term options. So far, without a Republican partner, the
Democratic push for retroactive legislation is stalled.
Wyden's committee will hold a hearing on inversions and
international taxes July 22. Finance Committee ranking member Orrin
Hatch (R-Utah) said July 17 he is willing to consider a narrower
proposal to address inversions. He opposes the Democrats' approach and
hasn't offered details on what he would
At least eight pending inversions by U.S. companies announced
before and after May could be affected by legislation backed by Wyden,
Sen. Carl Levin (D-Mich.) and Treasury Secretary Jacob J. Lew. They
are: AbbVie, Medtronic, Mylan, Salix, Auxilium Pharmaceuticals Inc.,
Chiquita Brands International Inc., Horizon Pharma Inc. and Applied
Under current rules, U.S. companies can change their tax home
through a merger if the former shareholders of the foreign company own
at least 20 percent of the combined company. Executives aren't
required to move and many inverted companies are run from the U.S.
The proposed law would raise that threshold to 50 percent. It
wouldn't affect companies with completed inversions, such as Eaton
Corp Plc and Actavis Plc.
Congress also should limit inverted companies from using offshore
profits that haven't been taxed by the U.S., said Edward Kleinbard,
former chief of staff of the congressional Joint Committee on
Medtronic, for example, has $20.5 billion in accumulated offshore
profits and is borrowing from that stash to finance its purchase of
Dublin-based Covidien Plc. Under the rule suggested by Kleinbard, that
foreign loan would be subject to U.S. taxes, just as if the money had
been loaned or repatriated to the U.S. parent company.
Changing the threshold and the access to offshore earnings would
“stop virtually all of these trades in their tracks,”
Companies, he said, would have little reason to proceed with deals
that would impose taxes on U.S. shareholders without the tax advantage
for the corporations.
The consequences would be even more severe if Congress passes a
retroactive law after the deals close, because they wouldn't be able
to renegotiate or unwind the agreements.
Retroactive tax legislation is “quite common,”
according to a 2012 Congressional Research Service report. For
example, in January 2013, Congress passed a law that revived and
extended dozens of tax breaks that lapsed at the end of 2011.
U.S. courts have upheld retroactive taxes, with the exceptions
coming in cases where fresh taxes were created retroactively or where
the law reaches back over an extended period, according to the CRS
“It would be rare for a tax provision to be characterized as
a 'wholly new tax' so long as taxpayers were on some kind of notice
that a tax might be imposed,” the report said.
The most recent congressional limits on inversions were passed
retroactively, following a pattern that Wyden is trying to
In 2002, the ranking members on the Senate Finance Committee--Max
Baucus (D-Mont.) and Charles Grassley (R-Iowa)--announced their plans
to limit inversions and set an effective date of March 21, 2002. The
law wasn't signed by President George W. Bush until October 2004--and
after negotiations had changed the effective date to March 4, 2003,
letting several companies avoid the higher tax.
Lew's mention of the May 2014 effective date in a July 15 letter to
lawmakers was designed to put companies on notice about the
administration's intentions, a senior administration official said,
speaking on condition of anonymity.
The official said the administration supports cross-border economic
activity--just not when it is being done for tax reasons that are
causing economically inefficient behavior.
The potential legislative risk to the deals isn't deterring
companies from acting in a competitive market, said Juliane Keppler, a
managing director of the global, tax and regulatory team at the NASDAQ
OMX Group Inc.
“Companies are going full-speed ahead with any plans they
have in place,” she said. “I don't think companies or
their advisers or their shareholders want to take a wait-and-see
attitude. And frankly, they don't expect it to necessarily be
The clause in the Salix deal is written so that the company could
back out of its agreement with Cosmo Technologies Ltd. if there is a
“change in law or official interpretation” that would make
Salix a resident of the U.S. and not Ireland for tax purposes.
It also lets Salix exit the deal if the Senate and House have
passed “substantially identical” bills on the issue, even
if they haven't become law.
Those clauses have “petrified” some investors who
bought the stock of the target companies and are worried about any
reason why the deals might not be concluded, Willens said.
“When you explain it to them,” he said, “it's
something that they're really uncomfortable with.”
The possibility of the U.S. limiting inversions is causing other
companies to think about a move. Among those considering an inversion
is Walgreen Co., the retailer with wider name recognition among U.S.
voters compared with the drugmakers that have inverted in the recent
“It's impossible to predict what Washington is going to
do,” said Vamil Divan, a drug industry analyst at Credit Suisse
Group AG in New York. “But they have to be talking about it in
the boardrooms of pharma companies and
The momentum to move abroad has offered a rich opportunity for
companies that have a foreign tax address to put on the plate. Shire
is getting a 49 percent premium to its average share price in the 20
trading days before AbbVie confirmed its pursuit of the company in
June. That compares with a median takeover premium of 33 percent among
the 40 biggest pharmaceutical and biotech takeovers in the past five
years, according to data compiled by Bloomberg.
Valuations like the one AbbVie paid may depend on the likelihood of
action from Washington.
“At some point this inversion stuff will slow down,”
Divan said. “If you're getting a massive premium because you
have that asset, if you consider an ex-U.S. domicile an asset, the
value of that could go down in the next couple of years.”
Other risks from Washington to such deals include federal
contracting ban proposals working their way through Congress.
Those proposals have attracted some bipartisan support. Previous
attempts to bar inverted companies from getting federal contracts
contained gaps that companies have
A version that passed the House in four separate bills would impose
a limit on companies that moved addresses to Bermuda and the Cayman
Islands. A provision in the Senate's defense-spending bill encompasses
a larger group of companies.
“That could be a sleeper,” Willens said. “That
sounds like it could get pretty serious, pretty quickly.”
The proposed limits in annual spending bills won't have much
effect, though, because many companies don't rely on the U.S.
government as a major customer, said Robert Burton, a federal
procurement lawyer at Venable LLP in Washington.
“If Congress wants to address what they view as a problem,
they really need to take on the difficult job of reforming the tax
code and not penalizing contractors through the procurement
system,” he said.
By Richard Rubin
With assistance from Drew Armstrong and Zachary R. Mider in New
York, Michelle Fay Cortez in Minneapolis and Derek Wallbank in
To contact the reporter on this story: Richard Rubin in Washington
To contact the editor responsible for this story: Jodi Schneider at
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