Paul L. Caron

Monday, September 15, 2014

Blanchard Takes Issue With Kleinbard's Call for Anti-Inversion Legislation

Tax Analysys Logo (2013) Kimberly S. Blanchard (Weil, Gotshal & Manges, New York), Blanchard Argues Against More Anti-Inversion Rules, 144 Tax Notes 1335 (Sept. 15, 2014):

I write to comment on Edward D. Kleinbard's recent article ['Competitiveness' Has Nothing to Do With It, 144 Tax Notes 1055 (Sept. 1, 2014)] on the subject of "inversions." Kleinbard is, as usual, erudite and funny, but all the erudition and humor in the universe cannot hide the hole in his argument.

There are two kinds of cross-border combinations in the world. One is a combination born out of business and economic sense, the kind that would happen whether or not there were tax advantages to doing the deal. The second kind of cross-border combination is one that is motivated at least in part by tax considerations. In the context of inversions, the motivating tax considerations are, usually, to reduce a U.S. company's effective tax rate on non-U.S. income and to find a way to redeploy offshore earnings outside the U.S. tax net.

So how do we define what is and is not an "inversion"? Kleinbard is unhappy with the definition Congress came up with, which employs an 80 percent ownership threshold to treat the foreign entity that is in form the acquiring corporation as a U.S. corporation. He wants to reduce that threshold to 50 percent. Presumably he wants to do that because he thinks that deals being done currently are bad "inversions" that aren't being captured. Apparently he doesn't believe that any of them are plain vanilla cross-border deals that would have been done whether or not any tax benefits were obtainable. In footnote 3, he states: Some corporate apologists have tried to limit the term "inversion" exclusively to describe the initial pre-2004 wave of self-inversions. These individuals prefer to pretend that the current tsunamis of inversions are just ordinary course cross-border mergers, but this is commercially inaccurate.

I am perplexed as to how Kleinbard can state with such conviction that the current wave of inversions does not, at least in part, consist of ordinary cross-border mergers. I am certain he did not personally plan and conceive of all of them. We must assume that what he actually means us to focus on are the subset of deals in which a U.S. company finds a foreign merger partner that will represent just over 20 percent of the total deal value, and that the U.S. company is doing this solely because that's what will pass muster under section 7874. ...

[I]n terms of where to set the ownership threshold -- I think we should declare victory and go home. Section 7874 has achieved its goal of putting a stop to single-company inversions of U.S. companies, which can still be done in other countries (and are in fact done quite routinely). The fact that deals can still happen below that threshold should not be news at all -- and certainly not fodder for several articles every week. If Kleinbard and others want to change the rules that apply to foreign-parented corporations, go for it. But we don't need more anti-inversion rules.

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