The continuing appeal of inversions
November 2015 | FEATURE | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
Tax inversion deals have made considerable waves over the course of the last 18 months or so. Inversions have been a perfectly legal and normal corporate transaction for some time; however, the process has been attacked by claims that it is both unpatriotic and damaging to the US economy. Companies that have opted to invert and relocate abroad have done so with a view to capitalising on less burdensome taxation requirements.
A tax inversion allows firms – typically US companies – to agree and complete an M&A transaction which sees the firm acquire an overseas target in a jurisdiction with a lower corporate tax rate. Once the deal has completed, the acquiring company merges with the target and then redomiciles in the target company’s homeland, or a third country with a lower level of corporate tax.
Following president Obama’s claim that inversion deals were unpatriotic, promises were made to get tough on inversions. To that end, lawmakers in Washington have made attempts to eradicate the practice from corporate agendas. The Treasury introduced a number of new guidelines designed to make it harder for companies to access overseas cash without having it taxed at US rates. They also tightened the standards for a merger to qualify as an inversion.
To some extent, the Treasury Department’s moves against inversions did pay some dividends. This was most notable in the fourth quarter of 2014. Spurred on by the loss of a number of high profile US corporates, including pharmaceutical powerhouse Mylan NV and fast food giant Burger King Corp, the Treasury did manage to stem the flow of big ticket, attention grabbing inversions towards the end of last year. Deals such as the Mylan and Burger King inversions caught the attention of the public because of their size and the high profile nature of the firms involved.
However, lawmakers have, on the whole, been unable to turn back the tide, with many companies opting to book their passage out of the US and into welcoming arms overseas. Furthermore, the administration has failed to win congressional support for additional legislative measures aimed at further stemming the flow of inversions. In 2014, the Treasury pledged to introduce a second round of anti-inversion measures, but the congressional Republican majority has been unwilling to clamp down further without an agreement for broader tax reform.
Although the stream of inversion deals has remained consistent, the majority of deals completed over the last 12 months have been smaller, in industries less likely to attract the ire of the media and government. Yet inversions are still a feature of the US corporate landscape. In 2015 to date, 66 percent of proposed US outbound deals were inversions. In 2011, inversions accounted for just 1 percent of outbound transactions.
Those crying foul in the US, arguing that inversions are unpatriotic, need only look to the data surrounding global corporate tax rates. The US levies a higher corporate tax rate than any other OECD country. In the US, the federal and state level of corporate tax combined reached 39 percent, well above the OECD average of 25 percent. It would be naive to think that global companies happily pay higher levels of corporate tax simply to remain domiciled in the US.
For many firms, it is simply too costly to remain in the US. To that end, in the span of just a few days in August, three more companies announced their intention to invert and redomicile elsewhere. On 6 August, fertiliser manufacturer CF Industries and Coca-Cola Enterprises, a drinks bottler, both announced their intention to redomicile their operations in the UK following mergers with non-US companies. The UK corporate tax rate is around 20 percent. On 11 August, crane manufacturer Terex released details of a merger with Finish rival Konecranes, a move which will see the newly merged company enjoy a combined $10bn in annual revenues. These three deals mean that five inversion transactions had been agreed by the beginning of August, with several other deals also under consideration.
Following the announcement of these three deals, a Treasury spokeswoman said in a statement, “We are continuing to review a broad range of authorities for further anti-inversion measures to close loopholes that permit some taxpayers to avoid paying their fair share of taxes and we expect to issue additional guidance to further limit inversion transactions in due course”.
A response to the continuing spread of inversion deals is required for a number of reasons, not least of which is the competitiveness of US firms in international M&A markets. The lower tax obligations of non-US corporates has given them a competitive edge over US corporates in terms of agreeing and completing transactions in the US. According to data from S&P Capital IQ, in the first seven months of 2015, non-US domiciled companies completed $315bn worth of deals for US based targets. These transactions have been assisted by the lower tax rates on offer overseas. Accordingly, potential US acquirers are missing out, something which could also threaten jobs and growth going forward.
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