Bramwell’s Lunch Beat: The Bike Trip That Propelled Inversion Trend

Walgreens CFO exits ahead of tax inversion news
Deerfield, Illinois-based Walgreen Co. announced on Monday that it is replacing CFO Wade Miquelon, a move that comes just as the drugstore chain plans to announce a decision on whether it will nominally move its headquarters overseas to cut its US tax bill, Aamer Madhani of the USA Today wrote.

Walgreens is expected to announce soon – perhaps as early as this week – that it's completing a $16 billion acquisition of the European drugstore chain Alliance Boots.

With the deal, Walgreens will have an opportunity to complete a tax inversion, which would allow it to reduce its tax bill by a projected $4 billion over the next five years by listing the company's headquarters in Switzerland, where Alliance Boots is headquartered. The company said in June that it would announce its decision on whether it will move its headquarters overseas by early August.

Miquelon, who will be replaced by Kraft Foods Group executive Timothy McLevish, is the second top Walgreens executive to announce he's leaving the company in the lead-up to the tax inversion decision, Madhani wrote. Kermit Crawford, Walgreens president of pharmacy, health and wellness, announced last month that he would retire after spending 31 years with the company.

How tax inversions became the hottest trend in M&A
Shayndi Raice of the Wall Street Journal wrote on Tuesday that in 2010, a group of lawyers from New York and London took a bike trip through the rolling countryside of Southern France – and helped set the wheels in motion on the hottest new trend in mergers and acquisitions.

Part holiday, part corporate offsite, the peloton brought together top tax and M&A lawyers from Skadden, Arps, Slate, Meagher & Flom LLP. Deal making was in the doldrums, but, in tandem, some of the lawyers figured out a plan that could persuade clients to take the brakes off M&A.

Four years later, so-called “tax inversions” have been a major driver in cross-border deal making, accounting for 66 percent of announced deals this year, according to Thomson Reuters. That is up from just 1 percent in 2011. Skadden is at the front of the pack, involved in a whopping 78 percent of inversions by deal value since 2011, according to Thomson Reuters data, Raice wrote.

The premise behind inversions is that companies based in one country can benefit significantly by buying firms in another country where taxes are lower, reducing their overall tax rate. There have been 22 such deals since 2011, according to Thomson Reuters. Most have been in the pharmaceutical industry, where overseas sales generate significant income that cannot be brought back to the United States without suffering a major tax hit, Raice wrote. But there have also been inversion deals in the media, consumer, and manufacturing sectors. Some of those deals have collapsed, amid disputes over price and political scrutiny.

Don’t count on tax reform to stop inversions
In a August 4 blog for Tax Analysts, Martin A. Sullivan wrote that the conventional wisdom in the press and on Capitol Hill is that inversions occur because Congress has failed to enact tax reform.

“The United States has a high corporate tax rate and a worldwide system. Foreign countries have lower corporate tax rates and territorial systems. If the United States lowers its rate and adopts a territorial system, the incentive to invert will be removed, right? Well, no. Almost certainly not,” Sullivan wrote.

“Inversions occur for the simple reason that US tax rules are significantly more advantageous to foreign-incorporated businesses than to US-incorporated businesses. But in fact, the tax reform proposals that have been fleshed out on Capitol Hill so far do not eliminate the differential treatment of domestic and foreign corporations.”

Covington snags senior IRS official
Bernie Becker of The Hill reported on Monday that the law firm Covington and Burling has snagged ex-senior IRS official Sam Maruca to help bolster its corporate tax practice.

Maruca, who most recently helped enforce US policies on a key corporate tax maneuver known as transfer pricing, is rejoining Covington as a partner, in his second stint at the firm. At Covington, he’ll advise companies on much of what he focused on at the IRS, including transfer pricing and a range of other federal income tax issues, Becker wrote.

“I believe I can help the firm position itself as a global trouble-shooter and risk manager for multinational enterprises, wherever they may be headquartered or doing business,” Maruca said in a statement.

For the last three years, Maruca has been the director of transfer pricing operations in the IRS’s Large Business and International (LB&I) division. His departure is one of several recent exits from that agency division.

Road taxes are rising, even in tax-averse states
For nearly a century, Missouri has taxed drivers to pay for its roads. That's always provided enough – until now. David A. Lieb of the Associated Press wrote that on Tuesday, Missouri voters will decide on a historic change that would tax virtually everything they buy in order to yield more money for roads and bridges.

With Congress stymied over long-term highway funding, many states are taking it upon themselves to tackle the politically uncomfortable task of raising revenue for their aging transportation systems.

In the past year and a half, one-fourth of the states have hiked taxes, fees, or fines, and at least a dozen others are studying options, according to an Associated Press review. The push comes as the traditional revenue sources – federal and state fuel taxes – have deteriorated because of more fuel-efficient vehicles, more people driving less, and stagnant tax rates, Lieb wrote.

Missouri's highway budget is projected to plummet from a recent high of $1.3 billion annually to $325 million by 2017. There is no Plan B to replace that money if voters don't approve a sales tax that is projected to raise at least $540 million annually, Lieb noted.

Construction contractors, labor unions, engineering firms, and others have poured more than $4 million into the Missouri sales tax campaign and have outspent opponents by a more than 100-to-1 ratio. The advertising blitz is a necessity because Missouri voters have a history of rejecting tax increases.

Opposition is coming both from staunch conservatives, who oppose most tax hikes, and strident liberals, who fear the sales tax would hit the poorest the hardest while demanding nothing from the heaviest highway users, according to the article. The sales tax hike wouldn't apply to tractor-trailer rigs, which were exempted under a 2012 law.

Quick Links:

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  • All together now: US tax code is a rotting carcass (Forbes)
  • Sen. Wyden: US tax code a “rotting economic carcass” (Yahoo! Finance)
  • Corporate tax: Bring it up to code (Roll Call)
  • The tax dodge goes on (New York Times)
  • Corporate inversions, tax rates, and tax revenues (Cato Institute)
  • It’s not clear how to effectively deal with inversions (Tax Analysts)
  • The inversion excursion (Thomson Reuters Large Law Firms Blog)
  • Section 183 strikes another cattle operation (Tax Litigation Survey)
  • Tax Court holds IRS can issue Notice of Intent to levy while installment agreement offer in pending (Tax Litigation Survey)
  • Tax Court holds taxpayer can’t deduct estimated cost of customer loyalty discounts (Tax Litigation Survey)
  • The IRS’s God complex (National Review)
  • August to-do list: Vacation, shopping, school and taxes (Don’t Mess With Taxes)

 

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