Taxes Drove Valeant, Burger King Deals, Senate Report SaysRichard Rubin
Tax savings drove the acquisition strategy of Valeant Pharmaceuticals International Inc. and led to Burger King’s move to Canada, according to a U.S. Senate committee report.
Taxes appear to be much more important to the deals than the companies say, according to a report and testimony prepared for a hearing on Thursday.
Senator Rob Portman is using the hearing -- his first at the helm of the Senate’s premier investigative panel -- to build support for tax-law changes that reduce companies’ incentives to move their legal addresses out of the U.S. through inversions, and make it less likely they could be bought by foreign companies.
“We now have the facts to be able to show that in specific transactions, that U.S. taxes played a major role, and a role that was negative for U.S. jobs and investment,” Portman, an Ohio Republican, said in an interview Wednesday. “We were able to show very specifically how it works in the boardroom, kind of pull back the veil. And it’s disturbing because what it tells us is that the U.S. tax code is increasingly driving U.S. businesses into foreign hands.”
The report and the hearing offer a Republican reaction to foreign companies’ interest in acquiring American corporations and to a wave of cross-border mergers that have allowed an escape from the U.S. tax system.
Valeant, Burger King
At the hearing, executives from Valeant and Burger King’s owner, Restaurant Brands International Inc., will describe their strategies. And current and former executives for three U.S.- based companies are talking about the competition they face from overseas.
Jim Koch, chairman of Boston Beer Co., which makes Sam Adams beer, said investment bankers regularly approach him and tell him that foreign owners could reduce his company’s 38 percent tax rate to 25 to 30 percent.
“We’re vulnerable because we currently report 100 percent of our income in the United States,” he said, adding that his sole control of the company’s voting shares protects him.
Companies based outside the U.S. have several advantages, including lower statutory tax rates and little or no taxes on earnings outside their home countries. They can also engage in what’s known as earnings stripping, loading up the U.S. subsidiary with deductible debt.
Portman is diverging from the pattern set by his predecessor, Democrat Carl Levin of Michigan, who retired last year.
Under Levin, the Permanent Subcommittee on Investigations exposed tax maneuvers by Apple Inc., Hewlett-Packard Co., Caterpillar Inc. and Microsoft Corp., often with the aim of getting the companies to change their practices or prompting the Internal Revenue Service to investigate.
Portman is using Valeant and Burger King as examples with a somewhat lighter touch. He’s trying to bolster his case for changing U.S. international tax rules to let companies repatriate foreign profits without paying the U.S. taxes they would owe under the current system. He opposes the approach of the Obama administration, which wants to make it harder for companies to leave through inversions.
“To the extent there’s a villain here, it’s the U.S. tax code and Washington,” Portman said.
Senator Claire McCaskill of Missouri, the top Democrat on the committee, agreed with some of Portman’s diagnosis Thursday, but she warned that a switch to the tax system he favors could encourage companies to shift more profits overseas if not written carefully.
U.S. competitiveness is about more than just taxes, she said. It’s about infrastructure, the rule of law and a strong workforce.
“We should guard against any tax reform measures that threaten to erode the U.S. tax base and undermine these very clear-cut advantages,” McCaskill said.
While Valeant and Burger King don’t appear primed for a Levin-style interrogation, Portman’s report shows how the companies’ transactions depended on the tax savings.
Valeant, one of the pharmaceutical industry’s most acquisitive companies, has its legal address in Canada following a 2010 merger with Biovail Corp. The company then bought Medicis Pharmaceutical Corp., Bausch & Lomb Inc. and Salix Pharmaceuticals Ltd. and tried to by Allergan Inc., the maker of Botox.
“American firms could not match Valeant’s favorable tax position,” David Pyott, the former chief executive officer of Allergan, says in his written testimony for the hearing. “The tax-planning techniques available to foreign acquirers are too lucrative.”
‘Missed the Mark’
The Medicis deal, for example, had a net present value benefit to Valeant worth $981 million at statutory tax rates and $1.72 billion at the reduced rates available to a foreign-based company like Valeant, according to the report, which was based on company documents and interviews of executives. The deal “missed the mark” by the company’s own standards without the tax savings, according to the report.
“Tax savings helped justify the price that Valeant was able to pay while hitting its ambitious financial goals,” according to the report.
The report shows how Valeant used debt and intracompany transfers of intellectual property to push profits out of the U.S.
The company has a different analysis, one that appears at odds with its past statements to investors and acquisition targets.
“Valeant does not take into account tax synergies in either identifying or pricing potential acquisition targets,” Howard Schiller, Valeant’s former chief financial officer, said in prepared testimony. Schiller now serves on Valeant’s board.
Schiller’s testimony lists the non-tax strategic advantages of the company’s major deals.
In Burger King’s merger with Canadian chain Tim Hortons Inc., “tax considerations flatly ruled out the United States from the outset,” the report said.
The report cites a March 2014 presentation to Burger King’s directors, months before the deal was announced. At the time, the company was considering locating the combined corporation in the U.K., Belgium, Canada or Ireland.
Housing Restaurant Brands International in the U.S. would have destroyed $5.5 billion in value in five years, according to the report.
Joshua Kobza, the company’s chief financial officer, said in his testimony that Canada made sense as the headquarters for the combined company because it had the biggest concentration of assets, employees and income.
According to Kobza, Burger King’s taxes are only slightly lower now -- about three percentage points below its pre-merger 26 percent rate.
“Tax considerations were never the driving force for our transaction,” Kobza said in the testimony. “Rather, our primary motivation was to realize the greater business potential of combining these two iconic and complementary brands.”
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