Canadian Lawyer InHouse

December 2014/January 2015

Legal news and trends for Canadian in-house counsel and c-suite executives

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27 cANAdIANlAwyermAg.com/INhouse DECEmBEr 2014 S omething strange happened in 2014 — Americans became very interested in corporate tax policy. It started in the spring, when U.S.-based pharmaceutical giant Pfizer, which produces blockbuster drugs like Lipitor and Viagra, floated a possible merger with its British-based rival AstraZeneca. Normally a merger of that size would make a splash in the business pages, while eluding broader public scrutiny. But this was different. If the acquisition had gone through, Pfizer would have been able to relocate to the United Kingdom and avoid being taxed at the high Ameri- can rate on $69 billion of cash it held overseas. It would have been a sweet- heart deal for Pfizer — without moving any of its employees or facilities, the company would have been able to pocket billions of dollars that otherwise would have been earmarked for the Internal Revenue Service. The deal eventually fell through after As- traZeneca rebuffed multiple offers from Pfizer, but by that point, Americans had become familiar with the corporate maneu- ver known as an inversion — and they didn't like what they saw. At its most basic, an inversion is when a company re-incorporates abroad for tax purposes through a merger or acquisition. While inversions aren't a new phenomenon — according to the Congressional Re- search Service, 47 companies have inverted in one form or another since the 1980s — around half of those deals by dollar value were done in 2014. The backlash against inversions began to heat up throughout the summer as more po- tential deals from companies like AbbVie, Walgreen, Mylan, and Chiquita were an- nounced. A group of U.S. Senators intro- duced a bill aimed at shutting down inver- sions for two years. Fortune ran a blistering cover story calling inverting companies "positively un-American." The rhetoric reached a fever pitch in July when President Barack Obama said in his weekly radio address that inverting companies were taking advantage of an "unpatriotic tax loophole." August brought the news that Burger King would be moving its throne to Canada by acquiring Tim Hortons in order to create the world's third-largest fast food enterprise. But at a time when the United States is growing faster than almost any other devel- oped economy, why are corporations lining up to renounce the red, white, and blue and pledge allegiance to a foreign flag? America prides itself on being an excep- tional country and nowhere is that more clear than when it comes to its tax system. While almost all other nations tax solely domestic earnings, the United States taxes its corporations and their foreign subsidiar- ies on all of their income, no matter where it is earned. That means American companies operat- ing abroad will often be taxed twice — once by the country where they're doing business and again by the IRS. Companies can however defer paying those taxes until that money is brought back into the U.S., leading many major corpora- tions to hoard cash abroad. The total amount of money stashed outside of the U.S. has doubled from 2008 to $2.1 trillion, with some companies letting tens of billions of dollars sit idly outside of American borders. Inversions are one way these companies can put that money back to use without it being subject to the U.S.'s high corporate tax rate. Roy Berg, an American tax specialist at Moodys Gartner Tax Law LLP, says that U.S. authorities haven't been sitting idly by. "Treasury knows that's the name of the game," says Berg. "They're not stupid and they don't like it when you can step around rules like that." Since the 1990s, both Congress and the U.S. Treasury have been issuing new laws and regulations to try and put a brake on inversions. But companies have continued to find creative ways to keep the deals going. "Tax policy is always a game of whack-a- mole," says Berg. Take the rules set out in 2004, when Con- gress decreed that any inverted company that still had 80 per cent of the same shareholders as the previous American corporation would inversion BY ArSHY mANN

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