We've now had ample time to absorb the new rules intended to make corporate inversions less attractive. So are they working? Have prospective invertors abandoned their tax minimization strategies?
Thus far the evidence is mixed:
- Ohio-based Steris Corp. will forge ahead with its planned acquisition of U.K.-based Synergy Health PLC. The post-merger entity will be headquartered in the American Midwest but will have its tax residence in the United Kingdom, which offers a territorial regime and a favorable statutory rate. Next year the U.K. corporate tax rate will decline to 20 percent. That's roughly half the combined (federal and state) U.S. rate of 39.6 percent.
- Chicago-based AbbVie Inc. has announced that it is calling off the proposed acquisition of Ireland-based Shire PLC, a takeover that would have also resulted in a post-merger entity based in the United Kingdom. A statement from AbbVie's chief executive explains that "the agreed upon valuation (of Shire) is no longer supported as a result of the changes to the tax rules." The reversal will prove costly, it leaves AbbVie on the hook for a $1.64 billion 'break fee.'
- Minnesota-based Medtronic will proceed with its acquisition of Ireland's Covidien, but with a key adjustment to avoid hopscotch lending. Medtronic originally planned to use $14 billion in offshore cash reserves to acquire shares of Covidien but will now rely on conventional financing. Using its offshore stash would have likely triggered a deemed repatriation of previously untaxed profits for Medtronic, resulting in a massive U.S. tax hit.
It's too early to draw a definitive conclusion here, but it seems the world’s multinationals haven’t yet thrown in the towel on inverting to low-tax jurisdictions. Two of the three deals described above are moving forward.
The Medtronic example may best illustrate the contours of the new playing field: The recent rule changes have made external financing suddenly look a lot more desirable than certain types of intercompany lending. With interest rates low, the after-tax cost of a conventional loan seem pretty cheap while the after-tax cost of a deemed repatriation remains very high.
An unwelcome change in the cost of borrowing, or the valuation of a foreign target, doesn’t mean that inversion activity will go away -- the fundamental incentives for domestic firms to invert remain alive and well.