US Tax Inversion Planners Respond To Treasury Measures
Wednesday, October 8, 2014
The non-legislative measures put forward by the Treasury Department on September
22, to deter multinationals from using corporate inversions to
move their tax residence abroad and move away from the high United States tax rate, have so far produced a mixed bag of results.
The measures are aimed at preventing the methods by which inverted companies
access a foreign subsidiary's unrepatriated earnings while continuing to defer
US tax, and, in particular, at stopping "hopscotch" lending, whereby
low-interest loans skip over that subsidiary's US parent to go directly to a
foreign company. The measures also included strengthening the methodology for calculating whether
a company's former owners of the US entity owns less than 80 percent of the new combined foreign entity, as is required to qualify as a tax inversion.
However, while Treasury has succeeded, for example, in making Medtronic Inc's
USD42.9bn deal to acquire Dublin-based Covidien Plc, and move its tax residence
to Ireland, more expensive, it has not stopped the transaction.
Medtronic announced on October 3 that it now "intends to use approximately
USD16bn in external financing to complete the acquisition of Covidien,"
and that it still "expects the transaction to close in late 2014 or early
As financing for the transaction will be secured from the capital markets, rather
than from the USD13.5bn cash reserves held by its foreign subsidiaries, the
company has confirmed that, going forward, its ratio of gross debt-to-earnings
will be worse than under its previous plans. This could also have some effect
on the group's credit rating.
However, Medtronic has also emphasized that, despite the additional expense
of the new financing, the previously expressed strategic benefits of the transaction
for Medtronic remain clear; the deal will expand its portfolio of innovative
products and services, and drive more value and efficiency in its healthcare
products, with a presence in more than 150 countries.
Another US healthcare corporation, Salix Pharmaceuticals, has announced that it will pull out of its planned inversion with the
Irish subsidiary of Italian company Cosmo Pharmaceuticals SpA, despite having to pay a USD25m
Salix stated that it had "believed the combination would generate significant
value for our stockholders through the addition of key products to our development
pipeline and a more efficient corporate structure that would enhance our profitability.
Since then, however, the changed political environment has created more uncertainty
regarding the potential benefits we expected to achieve."
There has been no indication, as yet, as to the measures' impact on another high-profile inversion involving Mylan Inc's agreed acquisition of some of Abbott Laboratories's non-US
businesses and a move of its tax residence to the Netherlands.
It has been pointed out, however, that Mylan does not have the large foreign
cash reserves that are a factor in other deals. Mylan had said the transaction would have significant benefits in diversifying
the company's business, strengthening it in its largest markets outside of the
US, and providing new opportunities for growth. It has also indicated that its
tax rate can be expected to be lowered "to around 20-21 percent in the
first full year, and to the high teens thereafter, enhancing the company's competitiveness."
In a further separate development, Civeo Corporation
has announced that, after an assessment of structural alternatives for the company,
it has decided to continue as a corporation and execute a "self-directed
redomiciling" of the company to Canada, rather than, as had been expected,
convert to a real estate investment trust (REIT).
Civio, which mainly provides temporary and long-term housing for workers in
Canada and Australia, said that it more than qualifies for a redomiciling under
the US tax code, with "substantial business activity" in the relevant
jurisdiction, Canada. The Treasury's recent actions to rein in inversions cannot be
expected to affect those plans, which the company expects to complete over the
next six to nine months.
Domiciling the company in Canada is expected to achieve a tax rate of approximately
25-26 percent, 4-5 percent lower than the expected rate under a REIT structure,
under which it would have suffered high initial costs and increased borrowings.
REITS have been touted as an alternative to inversions. They do not pay corporate tax as long as at
least 75 percent of their total assets are "real estate assets"
and/or cash; at least 75 percent of gross income come from real estate-related
sources; and at least 90 percent of their taxable income is distributed to shareholders
annually in the form of dividends.
The possibility of using a REIT to reduce a company's tax rate has increased
since the Internal Revenue Service began, over the last year, to accept more
non-traditional real estate assets as qualifying for inclusion in such trusts.