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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, July 25, 2013

NY Times: Dell's Abandoned Foreign Dual Hybrid May be Template for Future Corporate Inversions

Dell LogoFollowing up on my prior posts (links below):  New York Times, Dell Considered Novel Tax Strategy in Buyout, by Lynnley Browning:

In the proposed buyout of Dell by its founder, the company considered but rejected as too risky a novel strategy that tweaks the now-curbed practice of corporations moving overseas to take advantage of lower taxes.

The strategy, drafted by JPMorgan Chase and disclosed in Dell’s regulatory filings in recent months, proposed a fresh twist on that practice, which has largely been banned by the IRS. In slides of a presentation dated last October, JPMorgan cited a “lack of precedent” for the strategy, calling it a “new structure — has not been executed publicly.”

Dell and its advisers decided not to use the strategy in part because of potential image problems with U.S. and European regulators and investors, people briefed on the matter said. But the new strategy could serve as a template for future buyout participants because it circumvents anti-abuse regulations, said Robert Willens, a tax and accounting expert. ...

Dell was presented with a maneuver that some tax lawyers said appeared legal but aggressive. ... The apparent reason is the strategy resembles a corporate inversion, a stamp in recent decades for tax-dodging corporations like Tyco International and Nabors Industries. Those companies prompted Congressional investigations and tougher IRS rules after they moved their headquarters to the offshore haven of Bermuda, with a post-office box holding company as the parent to the main U.S. subsidiary that housed operations and management. ...

The proposed strategy involved conducting the buyout through a newly created foreign entity that would have effectively owned Dell. Under U.S. tax laws, that foreign entity would have legally escaped U.S. corporate taxes because it would have been a partnership for U.S. tax purposes. At the same time, the foreign entity, whose jurisdiction was not specified, would have been treated under tax laws in that unspecified jurisdiction as a corporation and would have been subject to foreign taxes. Those two contrasting tax outcomes, embodied in one structure, would have created a “foreign hybrid,” able to navigate different national tax regimes and access offshore cash while paying little or no U.S. taxes.

The “unprecedented” piece in the JPMorgan strategy was the proposal that Dell designate the foreign hybrid as a partnership, securities filings show. The foreign hybrid would have held a new entity called Denali, which would have held Dell shares, and Denali would have owned Dell’s foreign subsidiaries. (Mr. Dell was known in secret negotiations on the buyout as “Mr. Denali.”)

Dell’s physical headquarters would have remained in Round Rock, Tex., while the company would have been able to tap into the cash and tax benefits of being legally based in a lower-tax country. And it would have been able to borrow money from cash-rich offshore subsidiaries to finance Dell’s operations, all without having to pay U.S. corporate income taxes. ...

Global tax officials have increasingly criticized foreign hybrids as leaching corporate profits out of higher tax jurisdictions. The OECD has railed against what it calls “hybrid mismatches” for several years.

Edward D. Kleinbard, a tax law professor at the University of Southern California and a former chief of staff of the Congressional Joint Committee on Taxation, called the strategy “a twist on the old corporation inversion that relies on the fact that U.S. companies can dress up their foreign entities in different costumes for different tax purposes.”

Whatever maneuverings are used, tax analysts are wondering precisely how the deal might take advantage of Dell’s considerable overseas cash hoard without generating large tax bills. (The U.S. corporate rate for bringing overseas cash home is 35%.) Dell has said it wants to tap nearly half of its estimated $10.4 billion in overseas cash and cash equivalents to help finance the buyout. The rejected strategy would have done just that. Reuven S. Avi-Yonah, a professor of taxation at the University of Michigan, said that other ways of structuring tax to access cash tax-free could present problems.“There are a couple of other options, but those have come under IRS attack,” he said, so the rejected option “would have been safer.”

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