President-elect Donald Trump’s election victory spells big changes in the world of M&A: potentially the death of the inversion.
Ironically, if Trump does put an end to the practice, he’d be completing the work of the Obama administration. During the 44th President’s term, inversions were targeted with a series of notices, each indicating that regulation would be forthcoming. Obama’s aim with such notices was to eventually make inversions more trouble than they’re worth. Meanwhile, his administration blocked certain big deals like the ill-fated Pfizer-Allergan transaction earlier in 2016.But while Trump won’t take the same notice-making, regulation-planning approach to inversions as his predecessor in the White House, he could still curb inversions via his plans for lowering corporate tax.
Inversions are often frowned upon. An obvious reason for any inversion is to escape the controlled foreign corporation (CFC) regime and, too, to avoid offshore earnings being taxed in the US. As such, the Obama administration’s attack on inversions was popular among many, even if causing a lot of heartache in C-suites up and down the land.
“The Obama administration tried to put up an inversion wall to keep companies in. Trump, of course, is famous for proposing an immigration wall to keep people out,” said Jason Kaplan, partner at Hogan Lovells.
“Under Trump, it’s quite possible neither will ever be built,” Kaplan said.
President Trump could certainly break his promise to build a big, beautiful wall on the Mexican border. He loves construction. But erecting a major border obstruction takes far more thought than decanting concrete in Manhattan’s Midtown East. And it’s also possible, as Kaplan suggests, that Trump could let the inversion agenda drop, although there’s another factor to consider. Trump’s rhetoric on big companies and their attitude to keeping profits and jobs abroad may translate into legislative action.
“I really think there will be some type of action against inversions,” said Bernie Pistillo, partner at Morrison & Foerster.
- Trump’s election victory could mean the death of the inversion;
- He may push to include anti-inversion measures in his wider tax reform;
- Alternatively, the new president may combine lower corporate tax rates with a tax holiday;
- Either way, the practice of inversions looks set to fall off in 2017;
- Some US companies will still be acquired, however, for strategic reasons.
Pistillo points out that Congress has always said it doesn’t want to act against inversions in a piecemeal fashion. Instead he feels any move will come in the context of overall tax and corporate reform, the prospect of which is now much more likely.
A GOP congress, Trump himself and even some Democrats agree on the need for infrastructure spending and see eye-to-eye on the need for some changes to the tax code, for instance closing carried interest benefits. That could lead to critical mass on tax and a grand bargain on spending and tax, one that sees airports improved, bridges built and corporates basking in an overall more tax-friendly environment. In short, what Trump has said on tax is not that far from the GOP blueprint for tax reform. It all revolves around substantially lowering corporate tax.
“We might have Speaker Paul Ryan’s proposal more fully baked in the next month or so, but all that’s been put out from anyone so far is a blueprint,” said Pistillo, who points out these things have a tendency to change radically by the time they’re legislation.
Nonetheless, such a new corporate tax regime in the US, especially in combination with Trump’s suggested tax holiday for the estimated $2.5 trillion in offshore earnings held by US companies abroad, would mean the incentive to invert simply fades away.
In any case, to date the way the statute has evolved has been a series of reactions to transactions that have occurred, a far from perfect approach.
“Maybe we’ll get a new inversion statute. That’s really what’s needed,” Pistillo said.
“Any major inversions could be subject to direct and negative comments from Trump. If I was a large company considering an inversion right now, I would think about that factor,” Kaplan said.
The Obama administration did implement one piece of legislation on inversions: related-party debt vs. equity regulations: section 385. That’s intended to protect against the erosion of the US tax base and because it’s final, it will remain in place.
That aside, the other possibility is that, rather than including further strikes against inversions as a part of wider tax reform legislation, the Trump administration will simply let the matter drop as a legislative or regulatory aim.
“As the so-called jobs President, Trump is against inversions. But he’s also anti-regulation, so it’s quite possible we’ll never see the final inversion regulations,” Kaplan said.
"Trump could become the reversion president"
Regardless of whether final inversion regulations come or not under the Trump administration, counsel agree on one thing: inversions that are done with substantial tax motivations in mind will be greatly reduced. Companies in the US will still be acquired for strategic and business reasons, but the tax motivation will become much more neutral.
“Trump could become the reversion president,” said Kaplan.
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