Burger King Worldwide Inc.'s deal to buy Tim Hortons Inc. and move its address to Canada will proceed, a company spokesman said Tuesday, a day after the U.S. Treasury Department announced plans to crack down on corporate inversions.
Scott Bonikowsky, speaking for Tim Hortons, said the deal is "moving forward as planned" and is driven by long-term growth and not tax benefits. The actions to halt inversions announced Monday by Treasury Secretary Jacob Lew are getting an immediate test as U.S. companies with pending deals decide whether to continue moving forward.
"These rules do not strike anything like a mortal blow to the pending deals," Robert Willens, a corporate tax consultant in New York, wrote to clients Tuesday as he assessed the likelihood that Medtronic Inc. and AbbVie Inc. will complete their pending mergers. "Such deals should proceed to completion without missing a beat."
Still, health care stocks in the U.S. and Europe dropped in response to Treasury's actions. And companies with unannounced deals may be reconsidering their plans, particularly if the benefits would stem from access to U.S. companies' foreign earnings.
"It potentially changes in a meaningful way the financial calculus that merger partners are going to undergo as they look at inversion," said Neil Barr, co-head of the tax department at Davis, Polk & Wardwell LLP in New York. "The needle appears to have moved pretty meaningfully."
Lew's goal was to have companies reconsider inversion deals already in the works. He also left open the prospect of future action aimed at earnings stripping, the post-inversion transactions that companies use to reduce taxes on U.S. income.
"This action will significantly diminish the ability of inverted companies to escape U.S. taxation," Lew told reporters during a conference call Monday. "For some companies considering deals, today's action will mean that inversions no longer make economic sense."
The Treasury announcement heightened the tension between the government and companies considering a foreign address to lower their tax bills. Lew and President Barack Obama made clear that they were prepared to use rule-making authority to try to stop some deals, even at the risk of a backlash from the companies and from Republicans, who complained that Lew's moves went too far.
The federal corporate tax rate is 35 percent, but a 2013 report by the Government Accountability Office found that U.S.-based profitable corporations in 2010 had an effective federal tax rate of 12.6 percent on their worldwide income, or 17 percent when state and local taxes are included.
A wave of inversions caught lawmakers' attention this year when large U.S. companies including Pfizer Inc. and Walgreen Co. explored transactions and Medtronic, AbbVie and Burger King moved forward with deals.
The new rules, which apply to all transactions that have yet to close, include a prohibition on "hopscotch" loans that let companies access foreign cash without paying U.S. taxes. They also curtail actions that companies can use to make such transactions qualify for favorable tax treatment.
The changes will have the biggest effect on the eight U.S. companies with pending inversions, including Medtronic and AbbVie, which plan the two largest such deals in U.S. history.
In its purchase of Covidien PLC, Medtronic plans to loan some of its untaxed profits outside the U.S. to its new Irish parent company. That transaction may be penalized by the hopscotch rule.
Treasury's actions may raise Medtronic's cost of financing without imperiling its deal or AbbVie's, Willens said.
Treasury stopped short of making the rules retroactive to deals that have been completed. Companies already reaping the benefits of a foreign tax address will face minimal changes except for the risk of a second round of earnings stripping.
"Taking a regulatory step was a big leap by the Treasury Department, yet they've only addressed part of the tax juice from U.S. companies inverting," said Steve Rosenthal, a senior fellow at the Urban Institute in Washington and a former corporate tax lawyer. "The earnings stripping remains a large problem."
David Woollcombe, a Toronto-based partner at McCarthy Tetrault LLP, said he doesn't see the regulations having much effect on deals or potential deals that are driven by a strong strategic rationale, as opposed to tax arbitrage.
The changes proposed will apply to pending and future deals and likely will diminish the tax advantage that U.S. companies have sought from an inversion, he said.
"They are trying hard to plug a leaky boat with a series of stopgap measures, as the prospect of meaningful U.S. tax reform in the short term is very low," Woollcombe said in an email. "The Democrats need to be able to point to some action having been taken in advance of the mid-term elections as inversions have become a political lightning rod."
Under current law, U.S. companies that invert through a merger are still treated as domestic for tax purposes if the former U.S. company's shareholders own more than 80 percent of the combined company. The administration wants to reduce that 80 percent to 50 percent, which requires legislation.
In the absence of legislation, the Treasury Department looked for ways to make it harder for companies to get around the 80 percent limit.
The new rules seek to limit so-called spin versions, in which U.S. companies spin off units into a foreign company.
They also would restrict use of a technique known as skinnying down, in which companies make special dividends to reduce their size before a merger to meet the current law's requirements.
U.S. companies wouldn't be as able to seek out so-called old and cold foreign companies with cash and other passive assets as merger partners to meet the rules.
Business on 09/24/2014