Overseas deal rules end one combo, alter another
New government rules aimed at curbing overseas deals that cut corporate taxes appear to be working, just not entirely the way regulators intended.
Salix Pharmaceuticals Ltd., based in Raleigh, N.C., said Friday it will scrap a planned merger with the subsidiary of an Italian drugmaker due to a changed "political environment" that creates uncertainty about the deal's benefits.
But another company, Minneapolis-based medical device maker Medtronic Inc., reacted to regulations announced last month by saying it will borrow money to pay for part of its nearly $43 billion acquisition of Ireland-based competitor Covidien Plc instead of using cash from Medtronic's foreign subsidiaries. Medtronic still expects to close its deal later this year or early next year.
In recent months, a wave of U.S. companies has announced plans for deals known as inversions that would let them reincorporate overseas or combine with a foreign company to lower their taxes in the U.S., which has the highest corporate tax rate in the industrialized world.
Medtronic announced its acquisition in June. A month later, U.S. drugmaker AbbVie ironed out a roughly $55 billion deal for Dublin-based Shire Plc. More recently, Burger King said it would acquire the Canadian coffee-and-doughnut chain Tim Hortons.
Burger King and other companies have said the tax breaks weren't the main motivation behind their deals, but that element has become a key focus of public and political backlash, particularly from Democrats. Critics have said that U.S. companies were creating a larger tax burden for everyone else by incorporating overseas, while still benefiting from the massive U.S. market for their products.
Drugstore chain Walgreen Co. acknowledged this pressure when it said in August that it would no longer pursue an inversion with health and beauty retailer Alliance Boots, which is based in Switzerland. It's still buying the company, but the combined entity will be based in the U.S.
Last month, the U.S. Treasury Department announced new regulations that took effect immediately and were designed to limit the benefits of inversions. The rules include barring certain techniques that companies use to lower their tax bills and tightening ownership requirements that must be met for such deals to occur.
Treasury Secretary Jacob Lew said then that the regulations will "significantly diminish the ability of inverted companies to escape U.S. taxation." He added that these deals would no longer make economic sense for some companies considering them.
Republicans countered by saying that President Barack Obama should pursue efforts to simplify the tax code, not punish companies.
Tax lawyer Bret Wells said the latest regulations amount to a version of the carnival game "whack-a-mole" that the government has been playing with companies for several years now. Wells, an associate professor at the University of Houston, said the government will come up with new rules to limit the practice every few years, and then companies will figure out a way around them.
He expects more companies to take the Medtronic approach of adjusting their deals and then proceeding.
Both he and Arizona State University professor Donald Carey say more comprehensive tax reform is required to ultimately stop inversions.
High taxes affect more than just a multinational company's decision to do an inversion, said Carey, a professor at the university's W.P. Carey School of Business. They affect decisions on hiring and where a company might build a new plant or expand.
"Inversions are just one symptom of a much larger problem," he said.