Dealmakers Ignore Tax Limit Plan Spurred by Pfizer BidRichard Rubin
Democrats in Congress are trying to block companies from cutting their tax bills by moving their legal address outside the U.S. through a merger.
Companies are forging ahead anyway.
“We’re working on a lot of deals that have this element to it,” said Robert Profusek, head of the mergers and acquisitions group at Jones Day in New York. “Nobody’s said, ‘Stop the music.’”
Lawmakers upset about so-called inversions are pledging that any limits they pass will be retroactive, to May 8. They haven’t attracted a single Republican supporter. That lack of bipartisanship has led companies and their advisers to shrug and keep planning similar transactions.
Since Jan. 1, 2012, 14 companies have completed or announced such deals. Investors are pressuring other companies such as Walgreen Co. to consider the idea at a pace that hasn’t slowed since Senators Carl Levin of Michigan and Ron Wyden of Oregon called for retroactive tax laws.
The proposed deal that piqued congressional interest this month was Pfizer Inc.’s bid to buy AstraZeneca Plc, take advantage of the lower U.K. tax rate and leave its top executives in New York. AstraZeneca rejected Pfizer’s offers, and Pfizer ended its bid yesterday.
Democrats’ attempt to build momentum for limiting such deals hasn’t persuaded companies that congressional action is imminent or likely. Corporate executives, frustrated at Congress’s slow pace in revamping the U.S. tax code, say the interest of shareholders requires them to consider ways to lower their taxes -- including inversions.
“The message out of Washington is confused and weak instead of strong and unified,” said Terry Haines, head of political analysis at New York-based research company ISI Group LLC.
Levin’s retroactive bill would effectively prevent U.S. companies from completing inversion deals through the acquisition of smaller companies in other countries. The foreign company’s shareholders would need to own at least half of the combined company, up from 20 percent today.
Levin’s plan also would limit those companies’ ability to be treated as foreign for tax purposes while keeping top executives in the U.S.
Wyden, chairman of the Senate Finance Committee, in a May 9 opinion piece in the Wall Street Journal, set a May 8 marker for retroactive legislation. He’s said his goal is to “freeze the linebackers,” an American football technique in which the offensive player fakes an action and makes the defensive player wait to see what he actually does.
That approach won’t work and won’t change the global mergers market, said Douglas Holtz-Eakin, an adviser to the Alliance for Competitive Taxation, a coalition that includes Pfizer, Google Inc. and Morgan Stanley.
The U.S., he said, should instead revamp its tax system to lower the 35 percent corporate rate and make it easier for companies to move profits around the world.
“We’re playing without a helmet and the game’s going on,” said Holtz-Eakin, who was an aide to 2008 Republican presidential candidate John McCain. “So we’re going to get killed.”
Levin’s legislation, which would expire after two years to give Congress time to revise the rest of the tax code, would generate $791 million in revenue, according to the congressional Joint Committee on Taxation. The permanent companion House bill from his brother, Representative Sander Levin of Michigan, would raise $19.5 billion over 10 years.
Those bills have the potential to affect several deals that have already been announced and not yet closed. They include Horizon Pharma Inc.’s purchase of Vidara Therapeutics International Ltd. and move to Ireland. That would reduce the company’s tax rate to the low 20s from the high 30s.
Timothy Walbert, chief executive officer of Deerfield, Illinois-based Horizon, said on a May 9 call with analysts that he doesn’t expect the transaction to be affected by the proposed legislation.
“While there’s a lot of noise in media that in some ways may scare people from doing future deals,” he said, “we see a low likelihood of any bill being successful and even less likelihood that any bill that would have a retroactive aspect would be passed through Congress.”
Companies will continue pursuing global mergers because of the business advantages, with the tax benefit of a new corporate home being a secondary issue, Profusek said.
“If Congress does something,” he said, “that’s not going to really affect whether global companies combine.”
Omar Ishrak, chief executive officer of Minneapolis-based Medtronic Inc., said in an interview that business strategy will drive decisions about mergers with taxes as one consideration.
“Obviously, we want to optimize our structure to deliver the most benefit for our shareholders once those strategies are fulfilled,” he said. “I don’t want to rule anything in or out.”
Companies can change the political dynamic, said Edward Kleinbard, former chief of staff at the Joint Committee on Taxation.
If a large, iconic U.S. company decides to flout the Democrats’ warning and plan an inversion transaction, Congress may be spurred to do something that now seems unlikely.
“Congress is motivated by policy and politics,” said Kleinbard, a tax law professor at the University of Southern California. “It’s also motivated by a sense of proper respect for Congress.”
Smaller, less-known companies considering inversions are less likely to provoke Congress -- and more likely to be hurt if a larger company prompts a change in the political climate.
In 2001 and 2002, a wave of actual and announced inversions into low-tax or no-tax jurisdictions -- including Ingersoll-Rand Plc and Stanley Works -- spurred congressional outrage. Then, the bipartisan duo atop the Senate Finance Committee -- Democrat Max Baucus of Montana and Republican Charles Grassley of Iowa -- said they would make any changes retroactive to March 21, 2002.
The proposal didn’t become law until 2004 as part of a broader corporate tax bill and it included an effective date of March 4, 2003.
Now, with Republicans in control of the House of Representatives and able to block legislation in the Senate, the lack of bipartisanship sends a signal to companies that Congress isn’t likely to act quickly.
That can change, Haines said, if there is “the combination of a rising number of inversions and Republicans feeling that their electoral prospects are damaged somehow by not addressing inversions this year.”
The bipartisan support for a revamp of the tax code also prevents Congress from acting. That measure, while unlikely to advance this year, is close enough within reach that lawmakers can point to it as the right context for narrower changes.
“This is a vivid example of just how much we need to fix the corporate code,” Holtz-Eakin said. “Everyone recognizes that, but we haven’t seen any movement so far.”
Lawmakers are deadlocked over the details of tax law changes along with the issue of whether the government should raise more revenue.
That environment has made it harder to close perceived tax-code loopholes, leaving an opening for companies to take advantage of the rules as they’re now written.
“So far, we have not seen the Levin bill have any chilling effect on transactions in the pipeline,” said Linda Swartz, leader of the tax group at Cadwalader, Wickersham & Taft LLP in New York. “The May 8 effective date is unlikely to hold.”
Instead, she said, companies are focused on trying to sign deals in the next couple of months. That way, she said, the deals can close by the end of the year -- the effective date for limits on inversions included in President Barack Obama’s proposed budget.
The bills are H.R. 4679 and S. 2360.