Thursday, May 8, 2014

Mergers and Taxes, A Follow Up on "Inversions"

Last week we commented on the increased number of "inversions" where a US firm is merged into a foreign firm to become domiciled in a more tax friendly country.  (See Politics, Taxes and Economic Reality.) Our argument was for recognition of the economic reality of the marketplace and the need for companies and countries to remain competitive.  Countries with unfavorable tax environments will lose business.  An unproductive tendency, we warned, is for countries to try to set up roadblocks inhibiting the laws of economics.  These attempts are generally unproductive and can create unintended consequences that only exacerbate the situation.

Indeed, an interesting blog from the Deal Lawyer, points out that the Treasury department has already implemented steps to prevent or slow down these inversions.  According to the article, current law states that the existing shareholders of the US firm must end up owning no more than 80% of the new company to create an inversion.  The law is being changed, however, to require existing shareholders to own less than 50% after the deal is complete.  Obviously, acquiring companies are not going to be anxious to give up such control.

The end result will be a rush to complete these deals before the new laws take place at the end of this year.  A better long term strategy for the United States or any country is to recognize the economic reality faced by business and understand motivations for the inversions.  Imprisoning business with uncompetitive laws may work in the short run.  It will never work in the long run.

All the best,


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