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Huntsman Corp.'s decision to use an IPO instead of a spinoff to split off its pigments and additives business is looking like a smarter, more tax-efficient move in light of the company’s newly announced merger with Swiss company Clariant AG.
Huntsman subsidiary Venator Materials Plc filed for a $100 million initial public offering on May 5. The Woodlands, Texas-based parent had originally planned to separate the pigments business using a spinoff, and even received a private letter ruling from the Internal Revenue Service concluding the transaction would be tax-free.
But practitioners say the company’s Clariant merger, announced May 22, would have likely caused the spinoff to be taxable, regardless of the ruling.
“Had the spin-off proceeded, it would almost certainly have been taxable” to Huntsman because of the merger, said Robert Willens, president of the tax and consulting firm Robert Willens LLC in New York. “It is highly likely that, due to the time proximity, the spin-off and the acquisition would have been seen as ‘part of a plan,’” under tax code Section 355(e), he said in a May 22 email to Bloomberg BNA.
Huntsman spokeswoman Nooshin Vaughn said May 22 that the decision to do an IPO was made “well before” the company’s decision to merge with Clariant. “The primary reason for pursuing an IPO as opposed to spin is because of the significant de-leveraging prospect the IPO provides to Huntsman, and had very little to do with tax, and nothing to do with” the merger, she said in an email to Bloomberg BNA.
While an IPO has tax consequences, it is still preferable to a taxable spinoff. Huntsman would at least get cash from the offering to offset any tax liability, Willens said. “A taxable spin-off is a much more onerous transaction, since the tax liability is the same as it would be if spinco’s stock were actually sold, but the ‘seller’ doesn’t raise any cash with which to pay the tax liability,” he said. “A taxable distribution of appreciated property is, for that reason, the ‘worst kind of taxable event,’” he said.
As part of the merger, former Huntsman shareholders will receive 1.2196 shares in the new company—HuntsmanClariant—for each Huntsman share they hold, with Clariant shareholders emerging with a 52 percent stake, a May 22 news release said.
Under Section 355(e), a spinoff is deemed taxable if it is “part of a plan” pursuant to which “one or more persons"—in this case the Clariant shareholders—directly or indirectly acquire stock representing a 50 percent or greater interest in either the spun-out entity or remaining company.
“I think Willens is clearly right in his analysis,” said Reuven S. Avi-Yonah, director of the International Tax LLM Program at the University of Michigan Law School. “If the merger was being contemplated there was a serious risk of running afoul” of Section 355(e), despite the PLR, he said in a May 22 email.
The Venator IPO, if successful, will allow the new company to be domiciled in the U.K. and take advantage of the country’s lower corporate tax rate at a time when inversions have slowed since the IRS began cracking down on them in 2014.
“Huntsman is fulfilling its inversion aspirations on a grander scale” with the Clariant merger, Willens said. “Clariant is a Swiss company and Huntsman will become a subsidiary of Clariant, positioning the parties for the ‘income shifting’ benefits an inversion normally entails,” he said.
“Even better, the Huntsman shareholders will not be taxed on the receipt of Clariant stock in the acquisition, because those shareholders, collectively, will not be receiving more than 50 percent of Clariant’s stock,” he said. This exception is spelled out in Treasury Regulations Section 1.367(a)-3(c), he said.
The way the merger is structured will also allow the new company to sidestep the IRS’s April 2016 anti-inversion rules, said Steven M. Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.
Huntsman shareholders will own only 48 percent of the new combined company. The anti-inversion regulations (T.D. 9761) under Section 7874 don’t kick in until U.S. shareholders own at least 60 percent of the corporation. The new HuntsmanClariant, which will be incorporated in Switzerland, will only be an inversion in the “colloquial sense,” not from a tax standpoint, since it doesn’t hit that 60 percent threshold, Rosenthal said.
Avi-Yonah said the merger shows that inversion-type transactions “can continue with the right partners even with all the statutory and regulatory hurdles.”
At the same time, the merger “might actually signal anticipation of the revocation of the Obama regulations” on earnings stripping that were proposed alongside the Section 7874 inversion rules and made final in October 2016, Rosenthal said. The rules, under Section 385 (T.D. 9790), are intended to curb efforts by multinational companies to “strip” income out of the U.S. through loans to subsidiaries.
“Huntsman could be betting that those earnings-stripping rules will go away” if the combined company is planning to shift profits overseas, Rosenthal said.
The government is reviewing the regulations as part of Trump’s April executive order directing the Treasury Department to scrutinize “significant” tax regulations issued since Jan. 1, 2016, for possible changes or repeal.
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