United States Inversion Opportunities

Capital Markets 2014 Mid-Year Report

By some measures, the United States imposes the highest nominal corporate income tax of any OECD country.1 As a result, a number of U.S.-based multinational corporate groups have recently decided to lower their overall effective tax rate by expatriating to another country. Generally this means combining with a foreign (non-U.S.) partner corporation in an “inversion” transaction. The trend toward inversion appears to be accelerating.

In a typical inversion, a U.S. corporation and a foreign partner effectively become subsidiaries of a new foreign holding company located in a low-tax jurisdiction such as Ireland. Shareholders of the U.S. corporation and its foreign partner transfer their shares to the new foreign parent in exchange for parent stock and possibly other consideration. The key to a successful inversion is that former shareholders of the U.S. corporation must own less than 80% of the stock of the new foreign parent. If the former shareholders own 80% or more of the new foreign parent, then the parent will be taxable as a U.S. corporation under the U.S. anti-inversion laws.

The tax savings of inverting can be dramatic. As reported in The Wall Street Journal, a successful inversion combining Pfizer Inc. and AstraZeneca plc could reduce Pfizer’s annual tax bill by $1 billion or more, according to one estimate.2

Recent Deals

Recent deals reflect the pattern of U.S. and foreign partners combining under a new parent in a low-tax jurisdiction. Earlier this year, for example, Endo Health Solutions Inc. (a U.S. corporation) combined with Paladin Labs Inc. (a Canadian corporation) under a new parent, Endo International plc (an Irish corporation).

The expatriating U.S. corporation often seeks a foreign partner already located in an appropriate low-tax jurisdiction, simplifying tax structuring. For example, the combination of Actavis, Inc. (United States) with Warner Chilcott plc (Ireland) under Actavis plc (Ireland) reflects this approach. The same could be said of the proposed combination of Pfizer Inc. (United States) and AstraZeneca plc (United Kingdom) under a new United Kingdom holding company.

One aspect of the Endo and Actavis transactions described above is the necessity for the expatriating U.S. company to identify a smaller but still substantial foreign partner. A foreign partner that is too small triggers the 80% rule described above. If, for example, the foreign partner is worth 20% or less of the combined company, then in an all-stock deal, the U.S. corporation’s former shareholders would presumably receive 80% or more of the shares of the new foreign parent. As a result, the new foreign parent would be taxable as a U.S. corporation.

A surge in inversions may indicate that some U.S.-based multinational groups believe the window of opportunity for inverting under the current rules could vanish.

On the other hand, if the U.S. corporation’s former shareholders receive between 60% and 80% of the new foreign parent stock, then a different anti-inversion rule applies. Under this rule, U.S. tax applies to certain “inversion gain” of the former U.S. parent over a limited period of time. Public filings by Actavis Inc. indicate that this tax on “inversion gain” may be triggered by its combination with Warner Chilcott plc.3

Based on the rules described above, a U.S.-based multinational group that seeks to invert must carefully select its foreign partner.

A Window of Opportunity?

The surge in inversions may indicate that some U.S.-based multinational groups believe the window of opportunity for inverting under the current rules could vanish. The current rules clearly have ceased to have the desired effect. As noted recently by John Koskinen, the U.S. Commissioner of Internal Revenue, “We’ve done, I think, probably all we can within the statute. We try to make sure people are within the bounds, but if they’re within the bounds, if they play according to the rules, then they have a right to do that [i.e., to invert].”4

If the groundswell of indignation over inversions fails to subside, then the U.S. Congress may feel compelled to act. One possible outcome would be for Congress to overhaul the U.S. tax regime and lower the corporate tax rates. At least as likely, however, is that Congress will enact severe new anti-inversion laws.

On May 20, 2014, U.S. Senator Carl Levin introduced legislation that would dramatically limit the ability of a U.S. corporation to expatriate. The legislation would replace the 80% threshold and the 60% to 80% rule described above with a single 50% threshold. In other words, ownership of more than 50% of the new foreign parent by former shareholders of the U.S. expatriating entity would cause the foreign parent to be taxable as if it were a U.S. corporation, thereby eliminating the U.S. tax benefit of inverting. The benefit would also be eliminated if the foreign parent’s expanded affiliated group is primarily managed and controlled in the United States and has significant business activities in the United States, whether or not the 50% test is satisfied.

If enacted as proposed, Senator Levin’s new rules would be effective for transactions completed after May 8, 2014, and before May 9, 2016. Thus the proposed legislation directly targets today’s typical inversions, including transactions not yet consummated, such as the proposed combination of Pfizer and AstraZeneca. Unlike the proposed legislation, similar anti-inversion rules proposed by the Obama Administration would affect only transactions completed after December 31, 2014.

How and when the U.S. Congress will act to stem inversions remains uncertain.


1 OECD, “Taxation of Corporate and Capital Income,” Table II.1. Corporate Income Tax Rate (2014), available at http://www.oecd.org/ctp/tax-policy/Table%20II.1-May-2014.xlsx

2 Liz Hoffman, “Pfizer Sees Tax Savings from AstraZeneca Deal,” The Wall Street Journal (April 28, 2014).

3 Actavis Inc., Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (filed August 1, 2013).

4 Quoted in Richard Rubin, “Treasury Said to Seek U.S. Crackdown on Corporations Making Offshore Tax Deals,” Bloomberg BNA Daily Tax Report (April 30, 2014).

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