Merger Rush for Offshore Inversion Tax Break Bets on Stalemate in Congress

By Richard Rubin    

July 21 --U.S. companies are racing to complete tax-reducing offshore mergers before a credible threat to stop them emerges from Congress.

AbbVie Inc., maker of the arthritis medicine Humira, July 18 announced the largest such inversion deal 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 May .

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.'”

Deal Contingencies

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 agreement.

No corporate inversion deal has closed since May 8, when Senate Finance Committee 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 held 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 support.

Insourcing Credit

Meanwhile, legislation giving companies tax incentives to move jobs back to the U.S., and to discourage moves out of the country, will face a procedural test in the Senate July 23.

Senate Majority Leader Harry Reid (D-Nev.) moved July 21 to limit debate on the Bring Jobs Home Act (S. 2569), forcing a vote July 23 that will require 60 supporters.

The legislation, sponsored by Sen. John Walsh (D-Mont.), would give companies up to a 20 percent credit for expenses incurred in relocating foreign operations to the U.S. Those expenses could include permit and licensing fees, lease and brokerage fees, and equipment installation costs.

To claim the insourcing credit, companies would have to boost their overall U.S. employment.

To discourage moves to foreign countries, the legislation would curtail tax deductions for the expenses of moving operations to other countries.

Sen. Debbie Stabenow (D-Mich.) has sponsored identical legislation as S. 337.

Pending Agreements

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 Laboratories, Inc., Salix Pharmaceuticals, Ltd., Auxilium Pharmaceuticals Inc., Chiquita Brands International Inc., Horizon Pharma Inc. and Applied Materials Inc.

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 Taxation.

Retroactivity Possible

Changing the threshold and the access to offshore earnings would “stop virtually all of these trades in their tracks,” Kleinbard said.

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 report.

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 the condition of anonymity.

Contracting Ban Proposals

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 obtaining federal contracts contained gaps that companies have exploited.

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.

With assistance from Drew Armstrong and Zachary R. Mider in New York, Michelle Fay Cortez in Minneapolis and Derek Wallbank in Washington

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net


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