Overview of Tax Inversions

SeptemberAugust 1, 2014 | Private Wealth Management

Tax Inversions have been in the headline lately as large US health care companies have turned to inversions to lower their tax bill and access cash held outside of the US. This is not a new phenomenon; in the last decade 47 corporations have moved overseas, but the uptick in announcements has garnered significant attention. We have recently gotten headlines of US companies like Medtronic (through a proposed acquisition of Covidien), AbbVie (through a proposed acquisition of Shire), and Mylan (through the proposed acquisition of Abbott’s ex-US generic business) pursuing inversions. Additionally Pfizer (with an attempted acquisition of AstraZeneca), Walgreens (speculated to be increasing ownership of Alliance Boots), and Hospira (speculated to acquire the medical nutrition business on Danone) have been rumored to go down this path.

What is a tax inversion? When a US company purchases a foreign company and as long as the shareholders of the foreign company own 20 percent or more of the combined entity, a company in the United States can adopt a new homeland for tax purposes as part of the acquisition, in that way lowering its taxes and permitting it access to cash held abroad.

As the Holder of the Acquiring Company’s Shares you should expect a Taxable Event. When you hold the stock of the company undergoing the inversion, the IRS is expected to treat the acquisition as a sale, requiring the holder to pay taxes on gains even though no shares have been sold. Under IRS rules, when a company moves abroad in a tax inversion, the buyer’s shareholders must pay capital gains if they will hold 50% or more of the shares (this is assumed to be the case with ABBV, MDT and MYL).

The Federal Government is calling these Inversions un-American. The Senate Finance Committee held a hearing to discuss the current US international system of taxation. At the hearing, both Members and witnesses agreed that corporate inversions are largely problematic; however, they disagreed as to how they should be dealt with. Currently, it is unclear whether legislative proposals to halt inversion transactions could receive necessary bipartisan support. While Credit Suisse believes it is a possibility for Congress to craft a bipartisan amendment that could be attached to a funding bill or year-end tax deal, they still feel that the probability still remains less than 50% that Congress could pass something that halts inversion transactions by year’s end.

Deal Specific AbbVie/Shire - ABBV reached an agreement to buy Shire, valued at $53.6B consisting of $41.78/share in cash and 0.896 ABBV shares for each SHPG share. Shire shareholders will own 25% of new ABBV, which will re-incorporate in the UK. ABBV believes it can lower its tax rate to 13% by 2016 from its current rate of 22%. The combined company will have sales of about $24B. ABBV agreed to a $1.6B breakup fee should the deal fall apart. ABBV expects the deal to close by the end of 2014. Holders of ABBV are expected to be taxed on the transaction, recognizing a gain on the date the deal closes. A new cost basis will then be established for the “new” ABBV shares.

Medtronic/Covidien - In June MDT agreed to acquire Covidien for $42.9 billion or $93.22 a share, consisting of $35.19 in cash and 0.956 MDT shares for each COV share. The deal, subject to approvals, is expected to close in late 2014/early 2015. The combined companies will have revenue of about $27 billion. The deal is also being structured as a tax inversion with MDT forming a new company to be based in Ireland due to its lower corporate tax rate of 12.5% compared to the U.S. corporate tax rate of 35%. Holders of MDT are expected to be taxed on the transaction, recognizing a gain on the date the deal closes. A new cost basis will then be established for the “new” MDT shares.

Robert W. Baird & Co. does not provide tax advice or services Please speak with your tax professional regarding all tax matters.

Kathy Blake Carey, CFA Ron Freisleben, CPA Katie Schoen, CFA, CAIA Kimberly Stulo, CFA Senior Vice President First Vice President Vice President Senior Vice President [email protected] [email protected] [email protected] [email protected] 414.298.2313 414.298.7637 414.298.1701 414-765-3895

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