CORPORATE FINANCING NEWS | MERGERS & ACQUISITIONS
A growing number of US corporations are using their overseas cash to fund mergers and acquisitions, rather than returning the money to the US, which has a 35% corporate tax rate, among the highest in the world. Corporate inversions, whereby a US company buys a smaller company in a low-tax country and then shifts its headquarters overseas to save on taxes, are also on the rise.
Mergers and acquisitions in Europe are finally picking up, with bids from the US leading the way, according
to analysts at Barclays Capital. “We estimate that the largest US companies by market cap have $974 billion of cash-like assets held overseas,” Barclays says. “Repatriation of this cash could have significant tax implications,
which may make it more attractive to use this cash for overseas M&A.”
Pfizer’s $106 billion takeover bid for Britain’s AstraZeneca has put the spotlight on tax-driven deal making, but
there appears to be little US authorities can do to halt such transactions under current laws. Pfizer, whose first
two bids for AstraZeneca were rebuffed, is seeking to merge the two companies into a UK-domiciled holding company, which would be subject to a 21% corporate tax rate.
Pfizer says there are strategic business reasons for its proposed deal, but acknowledged it would gain a “more efficient tax structure.” Pfizer has an estimated $69 billion of offshore cash.
General Electric’s bid for the energy assets of France’s engineering company Alstom is another recent example of a major US company seeking to use its cash outside the US to acquire a European company. GE claims, however, that it is making the proposed deal for business reasons and not to avoid taxes on its $57 billion of overseas cash.
John Koskinen, commis-sioner of the US Internal Revenue Service, says the government probably cannot take action against corporate inversions under the current US tax code. “We try to make sure people are within the bounds, but if they play according to the rules, then they have a right to do that,” Koskinen told reporters in Washington on April 30. He said the tax code should be revised.
Patrick Cox, a partner at Withers Bergman, a law firm that advises clients on effective tax strategies for cross-border business, notes that the Obama administration has called for changes to the inversion rules as part of the 2015 budget proposal. He adds, “It is unlikely that the proposed changes will go through, however, because of the section regarding management location.” It would require a sea change of policy for the US to define a company’s residency status on the basis of where its “mind and management” is located, instead of where it is incorporated, Cox says. Nobody wants to be blamed for causing an executive flight from the US, he notes.
A wave of follow-on inversion activity could develop, as other companies become more aware of the opportunity to take advantage of a lower tax rate, Cox says. There are reputational risks involved, however, and manufacturers might not want to lose their “Made in USA” branding, he adds.
One solution for the US would be to lower the corporate tax rate—although that would present its own challenges, not least reducing much-needed tax revenues. There is an ongoing international effort to harmonize tax policies, but it is moving at a glacial pace, Cox says. The Organization for Economic Cooperation and Development, for example, is studying “base erosion profit sharing,” which ultimately could lead to profits’ being taxed in jurisdictions where they are earned. Under the OECD’s action plan, the first rules would not be written before the end of 2015.