Paul L. Caron

Monday, January 21, 2013

Dell Is 'Hoisted on its Own Tax Petard' in Proposed LBO

Dell LogoBloomberg:  Dell Leveraged Buyout May Hinge on Cash Hoard Outside U.S., by Zachary R. Mider & Jesse Drucker:

Michael Dell’s plan to take his computer company Dell Inc. private may hinge in part on whether he’s able to exploit one of the company’s most valuable assets: as much as $14.2 billion of cash and bonds outside the U.S.

Like many of the world’s largest technology companies, Dell has legally avoided billions of dollars in income taxes by attributing profits to overseas subsidiaries in tax havens. Bringing the cash back to the U.S. to finance the buyout would risk subjecting the money to the 35% corporate income tax rate, with a credit for any foreign income tax they’ve already paid. ...

Over the years, U.S. companies have employed a variety of tax-planning techniques for bringing that cash back to the U.S. while still avoiding the income-tax hit. The strategies have spawned colorful nicknames, inspired by the relevant sections of the tax code, like the “Killer B” and the “Deadly D.” Some companies have found ways of using a merger transaction to repatriate cash without triggering certain taxes. ...

“There are ways of doing it in the context of a buyout or merger that are more flexible than what you can do in the normal operation of a business,” said Reuven Avi-Yonah, a tax professor at University of Michigan Law School. Even pledging the offshore cash as collateral for a buyout loan could amount to “repatriation” and trigger a tax bill, said Robert Willens, an independent tax consultant based in New York. So companies often skirt this rule by instead pledging the stock of their foreign subsidiaries that hold the cash, he said. They can pledge as much as two-thirds of the equity before the cash is considered repatriated, he said.

“Dell is hoist by its own petard. They have systematically played the global tax avoidance game, and now find themselves with cash just beyond their reach, at least without taking a big tax and financial accounting hit,” said Edward Kleinbard, a professor of tax law at the University of Southern California, and former corporate tax attorney at Cleary Gottlieb Steen & Hamilton LLP. “No doubt Michael Dell will urge Congress to let him off the hook by way of another repatriation holiday.”

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