Huntsman: Venator IPO a ‘Natural Inversion,’ Creates Tax Edge

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By Allyson Versprille

Huntsman Corp.'s Venator Materials’ initial public offering will act as a “natural inversion” that will enable the company to take advantage of lower tax rates, a Huntsman executive said.

The IPO will allow the new company, Venator Materials Plc, to be domiciled in the U.K. and pay a lower corporate tax rate of about 25 percent, a Huntsman spokeswoman told Bloomberg BNA.

Splitting off Venator Materials—a pigments and additives manufacturer and wholly owned subsidiary of Huntsman—through an IPO is “a natural inversion, because almost all of our assets sit outside of the U.S. anyway,” J. Kimo Esplin, executive vice president and chief financial officer, said May 16 on a Goldman Sachs & Co. webcast.

“This is clearly an inversion,” said Robert Willens, president of the tax and consulting firm Robert Willens LLC in New York. If the transaction is successful, “we’ll now have a foreign corporation owning stock of U.S. corporations and they’ll be able to shift income from the U.S. to the U.K., just like you do in any inversion,” he said.

Completing a corporate inversion deal has become more complicated since the Internal Revenue Service and Treasury Department started to crack down on them in 2014. The IRS didn’t return requests for comment.

These efforts were a top priority for the Obama administration. It remains to be seen what stance the Trump administration will take, but recent anti-inversion rules weren’t well-received by conservative lawmakers.

More Efficient

Huntsman, which is based in The Woodlands, Texas, had considered spinning off Venator but decided an IPO would be a more efficient route for separation, Esplin said.

“There’s a taxable transaction to get the joint venture out from underneath the U.S., but it’s a pretty easy inversion because it’s naturally inverted. It’s run out of the U.K. anyway,” he said.

On May 5, when Venator Materials Plc filed its IPO of up to $100 million with the U.S. Securities and Exchange Commission, it pointed out that the IRS may not agree that the new company is a foreign corporation for U.S. federal tax purposes.

As part of the internal reorganization, Venator Materials will directly and indirectly acquire assets—including stock of U.S. subsidiaries and assets previously held by U.S. corporations—from affiliates of Huntsman, the company said in the SEC filing.

However, tax code Section 7874 says that in order for Venator to be considered a foreign corporation, the company can’t receive 80 percent or more of its shares—either by vote or value—from Huntsman’s U.S. subsidiaries, the filing said.

Easily Replicated

Willens said the Huntsman method is “exactly, 100 percent identical to the Johnson Controls/Adient situation,” except that a taxable spinoff instead of an IPO was used as the inversion vehicle.

Johnson Controls International Plc spun off its automotive business in October 2016 as Adient Plc, which like its parent is domiciled in Ireland. Johnson Controls also inverted in 2016, leaving Wisconsin to combine with Tyco International in Ireland.

Other companies could easily replicate the Huntsman strategy, Willens said. There’s nothing proprietary or particularly unique about Huntsman’s circumstances that would prevent other companies from replicating it, he said.

This kind of “do-it-yourself” inversion, either using a spinoff or an IPO, could become a more attractive way for companies to do inversions, Willens said. They just have to ensure that they meet the requirements of the 80 percent rule, he said.

This strategy is the 2017 version of “self-inversions,” Willens said. “Instead of trying to locate a foreign company that already exists that could acquire the stock of the U.S. company, you create your own foreign company.”

Open Inversion Floodgates?

The IRS and Treasury issued anti-inversion regulations in April 2016. The final, temporary (T.D. 9761) and proposed (REG-135734-14) rules modified the application of Section 7874 to inversion transactions and limited U.S. tax benefits of post-inversion planning.

Those rules are very mechanical, said Steven M. Rosenthal, senior fellow at Urban-Brookings Tax Policy Center. If companies are careful to meet all of the regulations’ requirements—including the 80 percent rule—they shouldn’t have a problem with the IRS, he said.

“The really interesting question to me is if those regulations are revoked—or anticipated to be revoked—whether that would cause the resumption of inversion activity,” Rosenthal said.

The Section 7874 rules are subject to President Donald Trump’s April executive order directing Treasury to scrutinize “significant” tax regulations issued since Jan. 1, 2016, for possible changes or repeal.

The American Institute of CPAs recently asked Treasury Secretary Steven Mnuchin to take a especially close look at the Section 7874 regulations, and the U.S. Chamber of Commerce has asked Treasury to throw out the rules.

With assistance from Laura Davison in Washington and Jack Kaskey in Houston.

To contact the reporter on this story: Allyson Versprille in Washington at aversprille@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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