Paul L. Caron

Wednesday, May 20, 2015

WSJ: Anti-Inversion Rules Fail To Rein In Tax-Driven Takeovers

EndoWall Street Journal, Rules Fail To Rein In Tax-Driven Takeovers:

Endo International PLC agreed to buy rival drug maker Par Pharmaceutical Holdings Inc. for $8 billion, the latest in a string of cross-border mergers steering tax revenue away from the U.S., despite Washington’s efforts.

Endo, which relocated from Pennsylvania to Ireland last year, is one of several drug companies lately using their lower-tax foreign addresses as springboards for acquisitions in the U.S., which has one of the world’s highest corporate tax rates.

The deals come as the U.S. Treasury last year moved to curb tax-revenue-draining deals known as “inversions” in which U.S. companies buy foreign ones and then move their legal home elsewhere to help lower U.S. tax bills. In doing so, experts say, Washington effectively locked in an advantage for those companies that already had redomiciled overseas, which can now apply their lower tax rates to U.S. assets they buy.

Companies that completed inversions before the rules changed, including Endo, Actavis PLC and, several years ago, Valeant Pharmaceuticals International Inc., have an advantage in deals for U.S. targets because, all other things being equal, they can wring more profits from companies than a U.S. owner can. ...

“The past eight months have shown that companies that already inverted have a huge competitive advantage in terms of doing deals,” said Christopher Cox, chairman of Cadwalader, Wickersham & Taft LLP’s corporate practice.

Two factors drive the tax arbitrage. First, the combined U.S. state and federal corporate tax rate is the highest in the developed world. Second, the U.S. taxes all profits of its companies, no matter where those profits are earned. Most other governments only tax profits earned in-country, which gives global firms based outside the U.S. wide leeway to minimize their tax bills.

Wall Street Journal, What To Know About Tax Inversions:

Inversions, takeovers that allow U.S. companies to lower their tax rates through a move overseas, fell out of favor after the Treasury Department last year tightened tax rules to make such deals more difficult and less lucrative.

While the rules curbed new inversions, they have given companies that moved overseas before the clampdown a deal-making advantage. Endo International PLC, which relocated to Dublin last year through an inversion, announced a deal Monday to buy New York-based Par Pharmaceutical Holdings Inc. for about $8 billion in cash and stock. The deal comes just months after Endo purchased Pennsylvania-based Auxilium Pharmaceuticals Inc. for $2.6 billion.

Here’s what you need to know.

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Assertions that most other countries do not tax foreign profits do require closer scrutiny. For example, it is true that Australia provides an exemption for most foreign profits derived by corporations but due to the features of its corporate imputation system when these profits are paid out to shareholders they do not carry franking credits and are taxed.

Posted by: Justin Dabner | May 20, 2015 10:19:02 AM