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Jan. 25 — Johnson Controls Inc. agreed to merge with Tyco International Plc, combining the companies’ building-control businesses and moving Johnson Controls' tax headquarters to Ireland.
Shareholders of Milwaukee, Wis.-based Johnson Controls will own about 56 percent of the combined company, the companies said in a Jan. 25 news release. This combination skirts Treasury Department rules that are seen as a weak and ineffective tool to stopping inversion deals. The rules kick in when U.S. shareholders own at least 60 percent of the combined company.
The transaction, the latest in a slew of companies opting to merge with an Irish company to avoid U.S. corporate taxes, is expected to create at least $150 million in annual tax synergies, the company said. Tyco, a former U.S. company that inverted in 1997, has been domiciled in Ireland since 2014, with prior stops in Switzerland and Bermuda. It is operated from Princeton, N.J.
The corporate tax rate in Ireland, where the new Johnson Controls Plc will be based, is 12.5 percent, among the world's lowest, compared with 35 percent in the U.S., the highest in the developed world. The deal looks similar to the $160 billion combination of Pfizer Inc. and Ireland-based Allergan Plc, announced in November, in which Pfizer shareholders will also hold 56 percent of the new company.
Immediate Tax Benefits
“As it relates to the tax synergies, we'll start seeing some tax benefits immediately,” Tyco Chief Executive Officer George R. Oliver said on a Jan. 25 conference call. “And then over time, we'll be able to effect all the tax synergies. But it's not back-end loaded.”
This announcement comes just a week after Tyco announced it had reached a favorable settlement with the Internal Revenue Service to pay about $500 million for deficiencies and penalties totaling more than $1 billion from recharacterized cross-border intercompany loans during the late 1990s (12 DTR K-3, 1/20/16).
Treasury officials have been asking Congress to pass legislation that could go further to stop deals that erode the U.S. tax base. The possibility of inversion-stopping legislation passing during a presidential election year is seen as unlikely, despite calls from Senate Finance Committee ranking member Ron Wyden (D-Ore.) and presidential candidate and Sen. Bernard Sanders (I-Vt.) for Congress to act after the Johnson Controls-Tyco deal.
“As long as earnings stripping remains in play, that seems to be the key,” Robert Willens, a tax consultant in New York, told Bloomberg BNA. “As the weeks and months go by, more and more people are convinced Treasury has absolutely no ability to change earnings stripping rules and that Congress is the only one who can do that.”
No. 1 Priority?
The transaction could move inversions to the top of the list of issues to be discussed at the House Ways and Means Committee Republicans agenda-planning retreat, said Henrietta Treyz, an analyst at Height Securities LLC. The retreat, which is expected to include legislation to revamp the international tax system, is scheduled for the week of Feb. 1.
Johnson Controls is based in House Speaker Paul D. Ryan's (R-Wis.) district. Waste Connections Inc., located in Ways and Means Committee Chairman Kevin Brady's (R-Texas) district, agreed to a deal last week to move its tax domicile to Canada (13 DTR G-2, 1/21/16).
Treasury and the IRS plan to issue regulations in the coming months implementing the “anti-inversion” notices, Notice 2014-52 and Notice 2015-79. The regulations could include changes to the so-called “skinny down” rules, which restrict a U.S. company from making distributions before an inversion to decrease the company's size and compensate shareholders. The rule doesn't apply if the foreign company supplies the cash, as Tyco has agreed to do in this case.
“The technical key is the cash which allows Johnson shareholders to fall below the 60 percent threshold,” Willens said about the $3.9 billion Tyco will pay to Johnson Controls shareholders. It raises the question of “will the IRS expand rules that say regardless of who provides the cash, the cash will be treated as a distribution by the U.S. company? This rule is so easy to circumvent.”
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