U.S. corporate mergers end “US personhood” and #IRS discount – increase value

Updated April 28, 2014 – with comment from the Isaac Brock Society:


Not quite on topic but I thought it would be interesting to note nonetheless.

Pfizer announced this morning that they had made an indicative proposal to AstraZeneca in January to combine the two businesses. The proposal was rejected by AstraZeneca but Pfizer is seeking to reengage. As part of the proposal, Pfizer was going to become a UK domiciled company.

The US has amongst the highest corporate tax rates in the world and taxes the difference between the local tax rate and the US tax rate if profits are repatriated from overseas. Pfizer’s annual report says they hold 10-30% of their cash and cash equivalents and short-term investments in US tax jurisdictions. This means that 70-90% of the $32 billion in cash and cash equivalents and short-term investments as at 31 December 2013 are held outside the US. If the business combination with AstraZenaca is successful (or a different combination with another overseas business), that’s $21-27 billion that will never be repatriated to the US.

The process of redomiciling overseas is referred to as a corporate inversion and used to be very rare. However, increasingly, US companies are doing so to get access to profits that are otherwise “trapped” overseas. Predictably, the US government enacted legislation to “punish” the executives of companies that pursued a corporate inversion. Their stock options would be subject to an additional tax upon vesting. Equally predictably, this legislation was buried in a jobs creation act.

It seems, however, that the additional tax on vested options hasn’t proven to be a disincentive. In fact, it might be an incentive. In the case of Actavis, the board allowed certain executives’ options to vest early and then reloaded them with new options. As the Bloomberg article points out, the executives of Actavis got the best of both worlds (http://www.bloomberg.com/news/2013-12-19/actavis-managers-reap-115-million-after-buying-warner-chilcott.html).

While corporate and individual taxation are not entwined, perhaps the news that one of the US’ largest pharma companies is seeking to redomicile will prompt much needed action on both fronts.





If you haven’t seen the article referenced in the above tweet, you should read it and perhaps comment. There is clearly an “IRS Discount” associated with any U.S. person or entity. They just aren’t worth as much as other people. Sad but true.

The Readers Digest version is:

Corporations are simply merging with non-U.S. companies to end “US person” status. Too bad individuals can’t marry non-U.S. citizens and end their status of U.S. citizenship. This is a fascinating article.

The Holy Grail objective is described as follows:

Executives at a California chip maker, Applied Materials, highlighted a number of advantages in announcing a merger recently with a smaller Japanese rival, but an important one was barely mentioned: lower taxes.

The merged company will save millions of dollars a year by moving — not to one side of the Pacific or the other, but by reincorporating in the Netherlands.

From New York to Silicon Valley, more and more large American corporations are reducing their tax bill by buying a foreign company and effectively renouncing their United States citizenship.

“It’s almost like the holy grail,” said Andrew M. Short, a partner in the tax department of Paul Hastings, which advises a number of American corporations on deals. “We spend all of our time working for multinationals, thinking about how we’re going to expand their business internationally and keep the taxation of those activities offshore,” he added.

It includes quotations from a familiar cast of characters:

“The impact in any one year may not be material, but the cumulative impact over time adds up,” said J. Richard Harvey, professor at the Villanova University School of Law. “Over time, more multinationals may want to expatriate or invert, and we could wake up in 10 or 20 years and it might be a meaningful number.”

I encourage you to get over there and add your comments to one spectacular comment from yet another familiar character:

This problem has a solution so simple and obvious that I stand in awe that Congress has not fixed it long ago. There are three necessary actions:

1. Replace the US territorial taxation systems with the international norm of territorial taxation. Exactly what the Simpson Bowles commission recommended.

2. Make US corporate tax rates competitive with those of our international trade competitors No new company with an ounce of financial sense would locate their world headquarters in the US with its high corporate tax rates world-wide taxation policy.

3. Replace the totally-unique US system of citizenship-based taxation with the universally-accepted world norm of residence-based taxation so that American companies can have American boots on the ground capturing markets for our competitively priced products. With 16 separate IRS tax publications containing 7,334 pages of instructions plus 667 pages of tax forms strictly for US citizens who live and work abroad, PLUS FBAR reports and with the the recently-enacted FATCA legislation, it has become impossible for middle-class US citizens to survive abroad unless he renounces US citizenship. So this makes it necessary for US companies to hire foreign mercenaries to sell our exports abroad, which is a total failure. That’s why the US has a job killing $715 billion trade deficit while most of our high-wage competitor countries have job creating trade surpluses.

Right on Roger!

Not even corporations can tolerate being “U.S. persons” anymore. Interestingly, Congress is aware of this:

That flurry caught the attention of Congress, and Senators Charles E. Grassley and Max Baucus proposed legislation to further curtail inversions. “These corporate expatriations aren’t illegal,” Mr. Grassley said in 2002. “But they’re sure immoral.”

“Immoral”? Being called “immoral” by Grassley is like being called ugly by a frog.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.