Companies Continue to Enjoy Inversion Benefits

While the federal government may be trying to prevent U.S. corporations from relocating overseas for tax purposes, it has failed to stop companies that have already completed such deals from doing their own follow-on acquisitions of U.S. companies.

On Thursday, Endo International PLC announced it would be acquiring Chesterbrook Pa.-based Auxilium Pharmaceuticals Inc. for $2.6 billion cash and stock. Endo relocated its headquarters to Dublin through a so-called inversion. The deal closed in February, before the government was able to set its sights on the arrangements. Inversions happen when a U.S. company buys a foreign rival, then relocates to a foreign country with a lower tax rate.

The Treasury Department tightened tax rules last month in an attempt to make the relocation process more difficult and less lucrative. Chief executives who had once been contemplating the structure, have now reconsidered or abandoned the deals altogether.

However, companies that were able to finalize inversions before the new rules took effect are now able to enjoy advantages when it comes to deal-making that U.S.-based rivals don’t, deal makers say. While the changes make it harder for U.S. companies to initiate inversions, they can still be targets of such deals, thus, becoming part of a foreign company and paying less in taxes.

Foreign companies benefit from the deals by reaping savings from bringing a U.S. target under its lower tax rate. It may also be able to free up that company’s overseas cash without paying U.S. taxes on the money. Some foreign entities purchase a U.S. target and then load the company with debt, effectively converting the target’s profit into deductible interest payments that go to the lower-taxed foreign parent.

“Generally it makes sense for any non-U.S. company that buys an American company to put debt on it because it will help reduce the tax rate,” said Conor Hurley, a senior tax partner for law firm Arthur Cox.

While the government’s efforts to put an end to inversion deals have made the process less appealing, relocations are likely to continue for quite a while.

Source: Mattioli, Dana, “Tax-Inversion Players Swoop in for Seconds,” The Wall Street Journal, October 9th, 2014