Monday, July 28, 2014

“Inversion” Takeovers

Standard treatises on mergers & acquisitions (M&A) contain the usual benefits or rationale for why a company would take over another. These include growth, size, synergies, and so on. One of the significant benefits of takeovers could also be tax synergies such as setting off the losses of one company against the losses of another. Similar benefits may be available with respect to unabsorbed depreciation and other capital allowances in the loss-making company.

In recent times, a whole new tax rationale has been driving M&A activity in relation to US companies, and that is to achieve relocation of U.S. businesses into other jurisdictions so as to minimise the effect of exorbitant U.S. taxes. This is accomplished through “inversion” deals. “Inversions” are described in the Wall Street Journal as follows:

Inversions enable a U.S. company to lower its tax rate. In these deals, a U.S. company buys a foreign target and adopts its home country’s domicile, or the combined company establishes a holding company in a country with a low tax rate. U.S. companies can lower their tax rate to the single digits from as much as 35% through an inversion.

An explanatory video is also available through the M&A Law Prof Blog.

Inversion deals have become quite common in the pharmaceutical and healthcare sectors, with Ireland and the Netherlands becoming common destinations for U.S. companies to relocate to. The deal that has been making waves is U.S. company AbbVie’s proposed acquisition of Shire PLC for US$ 54 billion (as discussed here and here).

Inversion deals give rise to greater concerns in countries such as the U.S. where not only are tax rates high but even the global income of U.S. companies are subject to taxation. There are potentially two ways to deal with this issue. One would be to impose legal restraints on inversion deals, a matter that the U.S. government appears to be seriously considering. The other is a more permanent solution to streamline and minimise the adverse impact of taxation on U.S. businesses.

The issue of reincorpoation and corporate migration is not limited to taxation concerns. Reincorpoations may occur due to other reasons, including onerous regulation in home jurisdictions. Hitherto, concerns had been expressed even in the Indian context due to policy paralysis and overarching legal regulations that led to a few companies relocating from India to other jurisdictions such as Singapore. Now that the Companies Act, 2013 permits Indian companies to amalgmate into foreign companies in reciprocating territories, relocations could very well be implemented through that method.

While inversion deals and cross-border mergers could provide sufficient flexibility to companies to manoeuvre around burdensome taxation or other regulation, equally there exists the concerns as to whether it leaves too much room to engage in tax or regulatory arbitrage through competition amongst various jurisdictions that might lead to a “race to the bottom”.

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