Paul Gilman Quoted About the Inversion Backlash in Canadian Lawyer Magazine

12.15.14

In the article titled, “The inversion backlash: As public awareness of corporate tax schemes becomes more mainstream, inversions have been put in the spotlight,” Aronberg Goldgehn attorney Paul A. Gilman is among several U.S.-based lawyers quoted on the subject. Written by Arshy Mann, and published in the Canadian Lawyer on Dec. 15, 2014, “The inversion backlash” article explores inversions - when a company re-incorporates abroad for tax purposes through a merger or acquisition

Mr. Mann writes that in 2014 Americans became very interested in corporate tax policy. It started when U.S.-based pharmaceutical giant Pfizer floated a possible merger with its British-based rival AstraZeneca. If the acquisition had gone through, Pfizer would have been able to relocate to the United Kingdom and avoid being taxed at the high American rate on the $69 billion of cash it held overseas.

It would have been a sweetheart deal for Pfizer, reports Mann. 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. 

Inversions aren’t a new phenomenon. According to the Congressional Research Service, 47 companies have inverted in one form or another since the 1980s. However, around half of those deals by dollar value were done in 2014, reports Mann.

Why are corporations lining up to leave the United States to pledge allegiance to a foreign flag? While almost all other nations tax solely domestic earnings, reports Mann, the United States taxes its corporations and their foreign subsidiaries on all of their income, no matter where it is earned. That means American companies operating abroad will often be taxed twice. Companies, however, can defer paying those taxes until that money is brought back into the United States, leading many major corporations to hoard cash abroad.

The total amount of money stashed outside of the United States 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, reports Mann.

Since the 1990s, both Congress and the U.S. Treasury have been issuing new laws and regulations to try to put a brake on inversions. But companies have continued to find creative ways to keep the deals going.

In 2009, the U.S. Treasury told companies they could only invert to countries where they had “substantial business activities,” eliminating previously popular destinations like Panama and Bermuda, reports Mann. And so companies started to invert to developed countries like Ireland, the Netherlands, the United Kingdom and Canada. Recipient countries like Canada have been reveling in the trend.

While relatively low corporate tax rates have certainly been a factor, some benefits have nothing to do with taxes, reports Mann. Canada is a more defendant-friendly jurisdiction with better liability protection than the United States. Even the Canadian court system can be an incentive to move because most civil matters are heard before a judge not a jury.

To that end, Paul A. Gilman says inverting companies like to stay within the developed world even though some developing countries may offer more attractive tax rates. “Once you move, you’re governed by the corporate law of that country,” Mr. Gilman is quoting as saying. “You have to be very careful that you’re not going to a jurisdiction that has a not very well developed body of corporate law.”

Further in the article, while reporting that a combination of political pressure and new Treasury rules has already put a number of deals on ice, Mr. Mann questions whether further anti-inversion legislation will kill inversions altogether.

On that subject, Mr. Gilman is quoted as saying, “It’s going to slow them down a bit but it’s not going to stop them.”

While the new rules did kill some of the proposed inversions, the majority of the deals are still going through. Some of the survivors, like Tim Hortons and Burger King, were motivated by more than just tax considerations, says Mr. Gilman. But even some of the deals that were heavily influenced by tax avoidance are still moving forward.“

As long as you can qualify for the inversion under the 80 percent test and deal with not having a hopscotch loan, you can still do it,” says Mr. Gilman. “The U.S. Treasury needs to deal with this from an economic perspective and try to get the U.S. tax code in line with the global tax scheme,” he says.

But it’s unlikely that will happen anytime soon, reports Mann.

“It’s a shame,” Mr. Gilman is quoted as saying. “You need tax reform; you need to find a way to get the trillions of dollars that is sitting overseas back to invest in the United States.”

To read the full article, please CLICK HERE.

About Paul A. Gilman

Paul Gilman is a member of Aronberg Goldgehn Davis & Garmisa and Co-Chair of the firm's Business Law & Transactions Group. He concentrates his practice in corporate, healthcare, tax, estate planning and real estate matters.

Paul advises clients on corporate formation and structure; contract preparation and negotiation; capital financing, including public and private offerings of securities, syndication of investment interests and  venture capital finance; and mergers and acquisitions. He counsels clients on tax and financial planning matters, including wealth and succession planning techniques.

Paul also serves as outside "general counsel" to a large number of privately held businesses, acting as a trusted advisor and counselor to these entities and their principals.

As a certified public accountant, Paul writes and speaks frequently on various tax, financial planning and employee benefits matters.



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