Deals challenge US inversions clampdown

An Obama administration crackdown to stop US businesses pursuing takeovers that let them escape the country’s high corporate tax regime was dealt a sharp rebuke on Thursday, after two deals paved the way for more companies to move their domicile to Europe.

In separate transactions, three of Coca-Cola’s European bottlers agreed a $27.5bn merger to form the region’s largest distributor of Coke products, while fertiliser maker CF Industries acquired assets from rival OCI for $8bn including debt.

Both will create new UK-based companies in so-called tax inversion deals, highlighting corporate America’s desire to move its tax base overseas.

The deals are a further indication that efforts last year by the US Treasury — and backed by President Barack Obama who labelled inversions as “unpatriotic” — have failed to stem interest in the manoeuvre.

At least 15 companies successfully struck inversions last year before the Treasury took action to limit the attraction of such deals.

Including Thursday's activity, five large inversions have been agreed in 2015 and several more attempts are under way, including Monsanto's $45bn pursuit of Switzerland's Syngenta.

Advisers said that the appetite for inversions has been at fever pitch again in recent months, as the Obama administration failed to gather congressional support to pass legislation intended to further stymie these deals with important tax components.

Frank Aquila, a partner at Sullivan & Cromwell, said: “US companies will continue to seek opportunities to level the playing field until Congress and the president recognise that the US tax code disadvantages US businesses.”

Dealmakers believe more large inversion deals are coming, given the reluctance of a Republican majority in Congress to clamp down on deals without an agreement for broader tax reform.

Christopher Cox, chairman of the corporate practice at law firm Cadwalader, Wickersham & Taft, said companies were still able to navigate the Treasury actions to complete beneficial inversions.

“The new regulations removed the benefits of so-called ‘hopscotch’ loans, which allow trapped offshore cash to be used to finance inversion transactions,” said Mr Cox. “But the door to do tax inversions is still wide open and for many companies it is still a very effective way to cut tax costs.”

The Treasury pledged last year to introduce a second round of anti-inversion measures and a spokeswoman said on Thursday: “We are continuing to review a broad range of authorities for further anti-inversion measures to close loopholes that permit some taxpayers to avoid paying their fair share of taxes and we expect to issue additional guidance to further limit inversion transactions in due course.”

The revival in inversions is helping to accelerate the pace of dealmaking since inverted companies have tax advantages over their non-inverted US rivals when seeking further acquisitions.

Foreign-domiciled companies have spent $315bn since January to buy US-domiciled targets, according to S&P Capital IQ, close to the record for the whole of 2007, the previous peak.

Many of these acquirers have been assisted by a lower tax rate, allowing them to compete more aggressively against would-be US acquirers. That is putting pressure on US companies, who complain that the US tax code is hurting their ability to compete globally.

Steve Rosenthal, senior fellow at the Tax Policy Center, a non-partisan think-tank said the Obama administration had been distracted by efforts on Capitol Hill — so far fruitless — to overhaul tax laws as part of an infrastructure bill.

“But who’s to say Congress will do anything? We’ve been waiting for a decade. It behoves Treasury to write [more anti-inversion] regulations on their own to the extent they can,” he said.

The White House would not comment on specific companies, but a spokeswoman said President Obama had made clear that Congress needed to act to close “one of the most unfair tax loopholes that allows” inversions.

“Our organisation will be driven by marketing concentrate, not by bottling”, said a Coca-Cola Company executive at a recent investor event. Alas the Coke supply chain is not as simple as the soda’s formula of high fructose corn syrup and water.

“While [Treasury secretary] Jack Lew has announced steps that the Treasury department is taking to reduce the benefits of this loophole, only Congress can close this loophole entirely, and the president continues to call on Congress to act,” she said.

While Coca-Cola Enterprises has not operated in the US since 2010, the US-based company with the exclusive licence to bottle Coke products in several western European countries has built a large overseas cash pile.

It will be able to access its non-US profits at a much lower rate than if it were to repatriate the funds. Coca-Cola Enterprises will own 48 per cent of Coca-Cola European Partners, which will be formed from a combination with its Iberian and German counterparts.

Meanwhile, CF Industries has the highest tax rate among its peers at 35 per cent. The deal for OCI will allow it to lower that rate to 20 per cent, the company said.

(Copyright The Financial Times Limited 2015)