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New Tax Law Haunts Companies That Did 'Inversion' Deals

By newadmin / Published on Sunday, 11 Feb 2018 14:24 PM / No Comments / 4 views


The headquarters of Valeant Pharmaceuticals International in Laval, Canada.
The headquarters of Valeant Pharmaceuticals International in Laval, Canada.
Photo:

Christinne Muschi/Reuters

The new tax law has something in store for some “inverted” companies that inked mergers overseas and lowered their U.S. taxes: higher taxes.

Companies that engineered so-called inversion deals in recent years have been able to reduce their tax rates and take certain deductions by shifting their tax homes to other nations. Now, provisions in the law restrict some of those deductions, like the interest payments American subsidiaries pay on loans from overseas parents, according to tax experts and companies.

Some inverted companies including

Johnson Controls International

PLC and

Eaton Corp.

have begun announcing in recent days that the law will raise their effective tax rates.

Valeant Pharmaceuticals International Inc.,

which moved to Canada in 2010 after buying a company based there, said it expects to pay “slightly more” in U.S. taxes.

“Many foreign-domiciled companies that use intercompany debt as part of their tax structure are likely to be impacted negatively,”

Paul Herendeen,

Valeant’s chief financial officer, said in an interview.

Overall, the new restrictions are estimated to raise tens of billions of dollars in tax revenue, though not all of it will come from inverted companies. Tax experts and companies say the law will reduce the advantages of the corporate relocations but probably not enough to bring companies back to the U.S.

Dozens of U.S.-based companies, such as

Mylan

NV,

Medtronic

PLC and Burger King Worldwide, now

Restaurant Brands International Inc.,

did inversions in recent years by buying foreign rivals in lower-tax countries like Ireland, Luxembourg and the Netherlands.

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Turnabout

Inversion deals lowered U.S. taxes for companies that merged with foreign firms. But the tax overhaul threatens some benefits.

#wsj-ai2html-1518118590436 position: relative; overflow: hidden; width: px; display: none; .wsj-ai2html-1518118590436aiAbs position: absolute; .wsj-ai2html-1518118590436aiImg display: block; width: 100% !important; #wsj-ai2html-1518118590436 p font-family: Arial,Helvetica,sans-serif; font-size: 13px; line-height: 18px; margin: 0; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-4-0 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 500; color: #000000; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-4-1 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 500; color: #323232; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-4-2 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 500; text-align: center; color: #323232; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-4-3 font-family: “Retina Narrow”,Helvetica,Arial,sans-serif; font-size: 13px; line-height: 16px; font-weight: 300; text-align: right; color: #333333; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-4-4 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 14px; line-height: 18px; font-weight: 300; text-align: center; color: #838384; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-4-5 font-family: “Retina Narrow”,Helvetica,Arial,sans-serif; font-size: 13px; line-height: 16px; font-weight: 300; text-align: right; color: #838384;

Top 10 tax inversions from 2013 to 2016 by value, in billions of dollars

$53.5

42.5

25.1

20.8

13.3

acquirer

Burger King Worldwide

Liberty Global

Praxair

Johnson Controls

Medtronic

Covidien

Virgin Media

Linde

Tyco Int.

Tim Hortons

target

10.3

6.6

6.4

6.3

3.4

Coca-Cola

Coca-Cola

GTECH SpA

Progressive Waste Solutions

IHS

Coca-Cola

Iberian Partners

Int. Game Technology

Markit

Coca-Cola Erfrischungsgetraenke

Waste Connections

#wsj-ai2html-1518118590436 position: relative; overflow: hidden; width: px; display: none; .wsj-ai2html-1518118590436aiAbs position: absolute; .wsj-ai2html-1518118590436aiImg display: block; width: 100% !important; #wsj-ai2html-1518118590436 p font-family: Arial,Helvetica,sans-serif; font-size: 13px; line-height: 18px; margin: 0; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-3-0 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 500; color: #000000; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-3-1 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 500; color: #323232; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-3-2 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 500; text-align: center; color: #323232; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-3-3 font-family: “Retina Narrow”,Helvetica,Arial,sans-serif; font-size: 13px; line-height: 16px; font-weight: 300; text-align: right; color: #333333; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-3-4 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 14px; line-height: 18px; font-weight: 300; text-align: center; color: #838384; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-3-5 font-family: “Retina Narrow”,Helvetica,Arial,sans-serif; font-size: 13px; line-height: 16px; font-weight: 300; text-align: right; color: #838384;

Top 10 tax inversions from 2013 to 2016 by value, in billions of dollars

$53.5

42.5

25.1

20.8

13.3

acquirer

Praxair

Medtronic

Burger King Worldwide

Liberty Global

Johnson Controls

Covidien

Linde

Virgin Media

target

Tyco Int.

Tim Hortons

10.3

6.6

6.4

6.3

3.4

Coca-Cola

Progressive Waste Solutions

IHS

Coca-Cola

GTECH SpA

Coca-Cola

Iberian Partners

Markit

Int. Game Technology

Coca-Cola Erfrischungsgetraenke

Waste Connections

#wsj-ai2html-1518118590436 position: relative; overflow: hidden; width: px; display: none; .wsj-ai2html-1518118590436aiAbs position: absolute; .wsj-ai2html-1518118590436aiImg display: block; width: 100% !important; #wsj-ai2html-1518118590436 p font-family: Arial,Helvetica,sans-serif; font-size: 13px; line-height: 18px; margin: 0; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-2-0 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 500; color: #000000; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-2-1 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 500; color: #323232; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-2-2 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 500; text-align: center; color: #323232; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-2-3 font-family: “Retina Narrow”,Helvetica,Arial,sans-serif; font-size: 13px; line-height: 16px; font-weight: 300; text-align: right; color: #333333; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-2-4 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 14px; line-height: 18px; font-weight: 300; text-align: center; color: #838384; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-2-5 font-family: “Retina Narrow”,Helvetica,Arial,sans-serif; font-size: 13px; line-height: 16px; font-weight: 300; text-align: right; color: #838384;

Top 10 tax inversions from 2013 to 2016 by value, in billions of dollars

$53.5

42.5

25.1

20.8

13.3

acquirer

Burger King Worldwide

Liberty Global

Praxair

Johnson Controls

Medtronic

Covidien

Virgin Media

Linde

Tyco Int.

Tim Hortons

target

10.3

6.6

6.4

6.3

3.4

Coca-Cola

Coca-Cola

Progressive Waste Solutions

IHS

GTECH SpA

Coca-Cola

Iberian Partners

Markit

Coca-Cola Erfrischungsgetraenke

Int. Game Technology

Waste Connections

#wsj-ai2html-1518118590436 position: relative; overflow: hidden; width: px; display: none; .wsj-ai2html-1518118590436aiAbs position: absolute; .wsj-ai2html-1518118590436aiImg display: block; width: 100% !important; #wsj-ai2html-1518118590436 p font-family: Arial,Helvetica,sans-serif; font-size: 13px; line-height: 18px; margin: 0; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-1-0 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 500; color: #000000; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-1-1 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 500; color: #323232; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-1-2 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 15px; line-height: 18px; font-weight: 500; text-align: center; color: #323232; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-1-3 font-family: “Retina Narrow”,Helvetica,Arial,sans-serif; font-size: 13px; line-height: 16px; font-weight: 300; text-align: right; color: #333333; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-1-4 font-family: Retina,Helvetica,Arial,sans-serif; font-size: 14px; line-height: 18px; font-weight: 300; text-align: center; color: #838384; #wsj-ai2html-1518118590436 .wsj-ai2html-1518118590436-aiPstyle-1-5 font-family: “Retina Narrow”,Helvetica,Arial,sans-serif; font-size: 13px; line-height: 16px; font-weight: 300; text-align: right; color: #838384;

Top 10 tax inversions from 2013 to 2016 by value, in billions of dollars

$53.5

42.5

25.1

acquirer

Liberty Global

Praxair

Medtronic

Covidien

Virgin Media

Linde

target

20.8

13.3

10.3

Johnson Controls

Burger King Worldwide

Progressive Waste Solutions

Tyco Int.

Tim Hortons

Waste

Connections

6.6

6.4

6.3

3.4

GTECH

SpA

Coca-Cola

IHS

Coca-Cola

Markit

Coca-Cola Erfrischungsgetraenke

Coca-Cola

Iberian

Partners

Int. Game Technology

Note: Inversions that were withdrawn are excluded.

Source: Dealogic

New Tax Law Haunts Companies That Did ‘Inversion’ Deals

The inversions drew the ire of Washington for cutting into U.S. tax revenue. In April 2016, the Obama administration issued rules designed to discourage the moves, including one that scuttled a $150 billion merger with

Allergan

PLC that

Pfizer Inc.

had pursued to relocate its tax home to Ireland, where the corporate tax rate is a comparatively low 12.5%.

The new U.S. tax law doesn’t target already-inverted companies specifically, tax experts and companies say. But it restricts things like interest deductions on which inverted companies rely heavily.

The provision known as the Base Erosion and Anti-Abuse Tax limits the degree to which big companies can deduct interest expenses and royalties that U.S. subsidiaries pay to their foreign parents. Another measure caps how much interest a company can deduct to 30% of their earnings before interest, taxes, depreciation and amortization.

Such provisions will bring the bills for some inverted and other foreign companies that shelter U.S. earnings closer to what U.S.-based rivals owe, according to

Bret Wells,

a tax professor at the University of Houston Law Center.

Congress estimated the base-erosion provision would bring in $150 billion in new tax receipts over 10 years, and the interest-expense cap would raise another $253 billion.

Eaton Corp.

, a manufacturer of electrical gear and truck transmissions that relocated its tax headquarters to Dublin from Cleveland after a 2012 deal, said on an earnings call its effective tax rate will go up by at least two percentage points to between 13% and 15% this year, and then stabilize between 14% and 16% in subsequent years.

Likewise, Johnson Controls, which merged with manufacturing rival Tyco International in 2016 partly to move its tax home to Ireland, said it expects its effective tax rate to increase two to four percentage points starting in fiscal year 2019 under the tax law.

Some inverted companies with heavy U.S. sales could benefit as much as U.S.-based companies from the overall reduction in corporate taxes, and offset the hit from the profit-sheltering provisions, tax experts and companies say.

Under the law, U.S. earnings will be taxed at a 21% rate, down from 35%. Citing the lower rate,

Mallinckrodt

PLC, a drug company based in the U.K. but with about 90% of its sales in the U.S., said it expects the law to be “neutral to slightly positive.”

Mallinckrodt said in a recent securities filing it would get a $450 million to $500 million deferred tax benefit from the lower U.S. corporate rate, which would “mostly be offset” by the new limitations on interest-expense deductions.

Similarly, Allergan, a drug company that moved its headquarters to Ireland after a 2013 acquisition but gets about 80% of revenue in the U.S., expects the loss of deductions on intercompany loans will largely be balanced out by lower taxes on its U.S. sales.

“A company like Allergan, which has a lot of income in the U.S., benefits from U.S. tax reform,”

Brent Saunders,

chief executive of the Dublin-based drug company, said in an interview.

Mr. Saunders said he didn’t expect Allergan would return its headquarters to the U.S. because of the tax law. “Ireland is an important place for us,” he said. What the U.S. tax law “could do is make the U.S. market more attractive as a place for investment.”

Write to Jonathan D. Rockoff at Jonathan.Rockoff@wsj.com and Nina Trentmann at Nina.Trentmann@wsj.com

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