Crackdown fails to halt flow of Irish tax inversion deals

A crackdown by the Obama administration on “tax inversion” deals, which allowed US companies to slash their tax bills, has had the perverse effect of prompting a sharp increase in foreign takeovers of American groups.

In September the US Treasury all but stamped out tax inversions, which enabled a US company to pay less tax by acquiring a rival from a jurisdiction with a lower corporate tax rate, such as Ireland or the UK, and moving the combined group's domicile to that country.

The move was designed to staunch an exodus of US companies and an erosion in tax revenues, but it has left many US groups vulnerable to foreign takeovers. Once a cross-border deal is complete, the combined company can generate big savings by adopting the overseas acquirer’s lower tax rate.

Since the crackdown, there have been $156bn of inbound cross-border US deals announced, compared with $106bn in the same period last year and $81bn a year earlier, according to data from Thomson Reuters.

By far the biggest acquirers have come from countries with lower tax rates such as Canada and Ireland, which have announced $26bn and $22bn of deals respectively, highlighting the competitive advantage that their companies have when it comes to mergers and acquisitions. Before the crackdown, groups from Germany and Japan were the biggest buyers of US companies.

So far this year, foreign buyers have announced $61bn worth of US acquisitions, an increase of 31 per cent on last year and the strongest start to a year for inbound cross-border deals since 2007, according to the data.

When the Obama administration changed the rules governing tax inversions, many bankers and politicians warned it would not stop the exodus of companies from the US unless it was accompanied by a reduction in the headline rate of US corporation tax, which stands at 35 per cent. However, gridlock in Washington has made it very difficult to achieve a comprehensive overhaul of the tax code.

Senator Rob Portman, an Ohio Republican, said the jump in foreign takeovers since the crackdown "shows that one-off solutions instead of tax reform simply won't work...The need for reform is urgent, and it's not a Republican or Democrat thing, it's non-partisan."

Investment bankers have been advising US clients — especially those in the pharmaceuticals and energy sectors — to seek foreign buyers so they can offer quick rewards to their investors via lower tax bills.

Furthermore, several American companies have built sizeable cash reserves outside the US in recent years, after they stopped the repatriation of overseas revenues to avoid being taxed at home. Being acquired by a foreign company would give them easy access to their cash piles.

However, George Bilicic, a vice-chairman of Investment Banking at Lazard, said there were other reasons for the jump in foreign takeovers. “Cross border M&A is being driven by US companies’ desire to go global and non-US companies seeking to expand in America, which is enjoying a period of strong economic growth.”

A Treasury spokesperson said: “The targeted anti-inversion action we took last year removed some of the economic benefits of inversions. But the only way to completely close the door on inversions is with anti-inversion legislation, and we have consistently called on Congress to act.

“As we’ve always said, we need to fix underlying problems in our tax code through business tax reform to address inversions and other creative tax avoidance techniques. We are committed to working with Congress to enact business tax reform that simplifies the tax code, closes unfair loopholes, broadens the base and levels the playing field.”

– (Copyright The Financial Times Limited 2015)