“Inversion” Takeovers

Standard treatises
on mergers & acquisitions (M&A) contain the usual benefits or rationale
for why a company would take over another. These include growth, size,
synergies, and so on. One of the significant benefits of takeovers could also
be tax synergies such as setting off the losses of one company against the
losses of another. Similar benefits may be available with respect to unabsorbed
depreciation and other capital allowances in the loss-making company.
In recent times, a
whole new tax rationale has been driving M&A activity in relation to US
companies, and that is to achieve relocation of U.S. businesses into other
jurisdictions so as to minimise the effect of exorbitant U.S. taxes. This is accomplished
through “inversion” deals. “Inversions” are described in the Wall
Street Journal
as follows:
Inversions
enable a U.S. company to lower its tax rate. In these deals, a U.S. company
buys a foreign target and adopts its home country’s domicile, or the combined
company establishes a holding company in a country with a low tax rate. U.S.
companies can lower their tax rate to the single digits from as much as 35%
through an inversion.
An explanatory
video is also available through the M&A
Law Prof Blog
.
Inversion deals
have become quite common in the pharmaceutical and healthcare sectors, with
Ireland and the Netherlands becoming common destinations for U.S. companies to
relocate to. The deal that has been making waves is U.S. company AbbVie’s proposed
acquisition of Shire PLC for US$ 54 billion (as discussed here
and here).
Inversion deals
give rise to greater concerns in countries such as the U.S. where not only are
tax rates high but even the global income of U.S. companies are subject to
taxation. There are potentially two ways to deal with this issue. One would be
to impose legal restraints on inversion deals, a matter that the U.S.
government appears to be seriously
considering
. The other is a more permanent solution to streamline and
minimise the adverse impact of taxation on U.S. businesses.
The issue of
reincorpoation and corporate migration is not limited to taxation concerns.
Reincorpoations may occur due to other reasons, including onerous regulation in
home jurisdictions. Hitherto, concerns had been expressed even in the Indian
context due to policy paralysis and overarching legal regulations that led to a
few companies relocating from India to other jurisdictions such as Singapore.
Now that the Companies Act, 2013 permits Indian companies to amalgmate into
foreign companies in reciprocating territories, relocations could very well be
implemented through that method.

While inversion
deals and cross-border mergers could provide sufficient flexibility to
companies to manoeuvre around burdensome taxation or other regulation, equally
there exists the concerns as to whether it leaves too much room to engage in
tax or regulatory arbitrage through competition amongst various jurisdictions
that might lead to a “race to the bottom”.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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