Tax System Gives Edge To Foreign Buys Of U.S. Firms
The Treasury Department’s crackdown on tax inversions last year has slowed but not stopped the movement of U.S. headquarters abroad as American businesses try to reduce tax bills and foreign firms seek to grow.
Indeed, with U.S. companies now virtually barred from relocating overseas in order to trim taxes, the Obama administration’s new rules may have turned corporate America into a well-stocked pond of bait for foreign sharks.
For instance, investors Monday absorbed Canada’s Valeant Pharmaceuticals (NYSE:VRX) deal to pay $10.1 billion to buy Raleigh, N.C.-based Salix Pharmaceuticals (NASDAQ:SLXP).
Salix is one example of a U.S. business that should benefit from the Canadian tax rate of 26%, as opposed to the U.S. rate of 35%. But holders of the Canadian company, at least initially, seemed to get the better part of the deal, trading up Valeant shares 14.7% Monday on Sunday’s announcement, while shares of the American firm fell 1.3%.
The cash transaction is expected to close in the second quarter.
Encouraging Foreign Buyers
The deal comes months after Valeant made a hostile bid for Calif.-based Allergan (NYSE:AGN). The Botox maker eventually was bought by Ireland’s Actavis (NYSE:ACT) for $66 billion. Ireland has a 12% corporate tax rate.
A smaller company like Salix typically wouldn’t draw the attention that Burger King (NYSE:QSR) did with its inversion-related purchase of Canadian coffee and doughnut shop Tim Hortons, in process last year when the Treasury announced its crackdown. But U.S. firms that aren’t large enough to garner big headlines are finding foreign suitors and their lower tax rates as enticing.
What’s more, foreign firms may find it easier to lure U.S. corporations into a marriage: Now only they can enable the bride’s dowry of reduced taxes and higher cash flow, while the brides have been barred by Uncle Sam from initiating the same marriage for similar reasons.
This greater financial efficiency also enables foreign firms to pay more to purchase American companies than a U.S. firm could justify to buy the same company.
“It has become attractive for companies to move their headquarters out of the U.S.,” said Will McBride, chief economist at the Tax Foundation. “These (new) regulations make it worse.”
The U.S. no longer dominates in the location of corporate headquarters as it did 15 years ago, McBride added.
Legal Then, Discouraged Now
For its part, Actavis, founded in Illinois and once headquartered in California and then New Jersey, hasn’t called the Irish capital its home for long. It relocated when it bought Dublin-based Warner Chilcott in 2013 — before Treasury’s new rules.
