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Bramwell’s Lunch Beat: More on Pfizer’s Tax ‘Inversion’ Deal

Apr 30th 2014
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SEC releases guidance on conflict minerals implementation
The US Securities and Exchange Commission (SEC) late on Tuesday released guidance on how companies should comply with the agency’s conflict minerals reporting rules in the wake of a US court decision that struck down key provisions of the rule, Emily Chasan, senior editor of the Wall Street Journal’s CFO Journal, reported today.

The rule requires companies to scour their supply chains for tin, tantalum, tungsten, and gold that may be tied to conflicts in the Congo region. The materials are common in electronic devices, jewelry, and auto parts.

But a federal appeals court ruled earlier this month that the portions of the rule requiring companies to say whether their products contained conflict minerals from war-torn region of the Democratic Republic of the Congo was invalid, Chasan wrote. But it wasn’t clear what companies would have to say in the reports that they file – until now.

The new SEC guidance says that companies would no longer have to describe their products as “conflict free,” “not conflict free,” nor “conflict undeterminable,” in regulatory filings, consistent with the court’s ruling, Chasan noted. Some companies would still have to file reports “including a description of the due diligence that the company undertook” to determine the origin of minerals it uses, the SEC said.

Companies that have to file reports are expected to do so before a June 2 deadline.

How tax laws distort the Pfizer deal
In an article for the New York Times yesterday, Victor Fleischer, a law professor at the University of San Diego, provides an explanation of “inversion” deals, like the one that Pfizer Inc. is using in its $98.7 billion bid to take over London-based pharmaceutical company AstraZeneca.

If the deal goes through as proposed, a new parent company in Britain would own the combined entity, making it easier for the new firm to strip income out of its American tax base.

“Inversions are especially popular these days for pharmaceutical and biotechnology companies, where most of the value of the company is found in tax-mobile intangible assets,” Fleischer wrote. “Recent examples include Valeant Pharmaceutical’s acquisition of Biovail, a Canadian company, and Endo Health Solutions’ acquisition of Paladin Labs, another Canadian company. Ireland is another popular haven: The pharmaceutical company Actavis moved to Ireland by way of merger with Warner Chilcott, setting up the expatriation of Forest Laboratories through a merger with the now-Irish Actavis. While the tax treatment of shareholders in the United States in inversions varies — they are sometimes taxed on built-in gains at the time of inversion — the underlying tax motivations for these deals are consistent.”

He added that the US tax code creates two reasons for these sorts of deals:

  1. American corporations must pay tax on worldwide income, not just income in the United States.
  2. American corporations may defer tax on most income from foreign sources until the income is repatriated to the United States.

Two giant banks, seen as immune, become targets
Ben Protess and Jessica Silver-Greenberg of the New York Timeswrote yesterday that federal prosecutors are nearing criminal charges against some of the world’s biggest banks, according to lawyers briefed on the matter, a development that could produce the first guilty plea from a major bank in more than two decades.

Prosecutors in Washington and New York have met with regulators about how to criminally punish banks without putting them out of business and damaging the economy, interviews with lawyers and records reviewed by the New York Times show.

“The new strategy underpins the decision to seek guilty pleas in two of the most advanced investigations: one into Credit Suisse for offering tax shelters to Americans, and the other against France’s largest bank, BNP Paribas, over doing business with countries like Sudan that the United States has blacklisted,” Protess and Silver-Greenberg wrote.

Grimm and Al Capone: A tax connection
Rachael Bade of Politicowrote this yesterday: “Some wonder why prosecutors shifted from probing Michael Grimm’s campaign funds to charging him with run-of-the-mill tax crimes. Think Al Capone.

“Of course, the New York Republican didn’t commit murder or build a bootlegging empire that would stump cops for years. But several years after federal investigators began probing Grimm, who maintains his innocence, for allegedly taking illegal campaign contributions, they indicted him Monday on unrelated, textbook tax fraud charges: underreporting business income and paying employees under the table – peanuts compared to what some were expecting.

“Sound familiar? America’s most notorious gangster, Capone was nailed for not paying his taxes after law enforcement couldn’t pin him for racketeering or murder or bribery.”

Ebay to take $3 billion tax charge
Greg Bensinger of the Wall Street Journalreported yesterday that eBay Inc. is taking the unusual step of bringing most of its foreign-held cash back to the United States – and with it a $3 billion tax bill.

The online marketplace reported first-quarter profit above forecasts, but the tax charge and a weak outlook for the current quarter sent the company's shares tumbling.

EBay said it would bring as much as $9 billion that it had previously designated as permanently invested overseas back to the United States, meaning it will pay tax on the difference between the US and foreign tax rates, Bensinger explained. The move appears to be one of the largest repatriations in recent years.

As of the end of last year, eBay said it had $12.8 billion in cash and short and long-term investments. Of that total, $9.7 billion was held overseas, according to securities filings.

US banks to help authorities with tax evasion probe
The Wall Street Journal also reported yesterday that the Swiss units of Goldman Sachs Group Inc. and Morgan Stanley have agreed with US authorities to hand over potentially incriminating details about how they might have helped Americans evade taxes, according to people familiar with the situation.

In return, the two banks won't face prosecution in the United States, though they could be hit with financial penalties equal to as much as 50 percent of the value of the undeclared US accounts they have handled, John Letzing wrote.

He noted that banks in this tier of the US Justice Department's self-reporting program, dubbed category 2, agree to comb through their books and compile information about how they set up Swiss accounts for US clients. That information, including how much was contained in the accounts, must be reviewed by an independent examiner.

The Justice Department has said that 106 Swiss banks, or more than one-third of the country's total, already have committed to category 2.

Greek nightclub basements focus of tax-evasion dragnets
A nightclub manager in northern Athens, Greece, sighs after two men and a woman in business suits push through the crowd and demand to see the cash register. Jonathan Stearns of Bloombergexplains: “The inspectors are the new face of Greece’s fight against an age-old problem of tax evasion. Their mission: to check whether the club has given customers automated receipts that allow officials to track sales. In Greece, clubs, bars, and restaurants have often avoided that paper trail to understate their revenue and reduce income- and sales-tax payments.

“As the country capitalizes on its first bond sale in four years and weans itself off 240 billion euros ($331 billion) in international loans, the authorities still must prove they can collect enough taxes to survive without aid,” he continued. “Even performing the most basic of state duties means overturning a tax-dodging culture rooted in centuries of occupation by Ottoman Turks followed by decades of apathy by the Greek state.”

Republicans pass tax breaks, but don’t pay for them
Republicans want to cut the deficit – and they want to cut taxes. Tuesday, those two sweeping goals collided as a GOP-controlled House Ways and Means Committee voted to advance $310 billion in tax cuts at the cost of adding those billions to the deficit, CNN Capitol Hill reporter Lisa Desjardins wrote yesterday.

She noted that Republicans insist their decision to choose tax cuts over trimming the deficit is nothing new.

“(Ways and Means Committee Chairman Dave Camp [R-MI]) has the position that extensions of current policy and tax cuts don’t have to be paid for,” said Camp spokeswoman Sarah Swinehart, according to the article. “Pay-fors are for spending. New spending. That’s his position.”

Yet, in Camp’s recent tax reform proposal, he did pay for all the tax cuts he extended. He did that largely by repealing other tax cuts, Desjardins wrote. But no congressional action is expected on Camp’s plan.

“Camp insists that’s not a contradiction,” Desjardins added. “His office argues that paying for tax breaks is only possible in a comprehensive revision of the tax system, not when tax breaks are taken one by one as the House is preparing to do now.

“The result: On Tuesday, Republicans on the Ways and Means Committee choose their anti-tax crusade over their image as deficit hawks,” she continued. “Next, all Republicans in the House will face a similar choice.”

[Click here for AccountingWEB’s article on the House panel’s vote yesterday to restore six business tax breaks.]

Quick Links:

  • According to this, suing auditors is trendy now (Going Concern)
  • CFO felon not sure why AICPA didn’t pick up the phone to talk about his fraud (Going Concern)
  • Rep. Dave Camp’s upstream battle for bipartisan tax reform (Fortune/CNNMoney)
  • European court rejects British challenge to tax on trading (New York Times)
  • Co-op Bank changes auditors after 40 years (The Guardian)
  • BBC dumps KPMG as auditor after 18 years (London Evening Standard)
  • OECD calls for tax overhaul to tackle income inequality (Wall Street Journal)
  • Illinois graduated income tax push stalls out (Chicago Tribune)
  • Push for progressive income taxes picks up in the blue states (Forbes)
  • Retailers that collect online sales tax lose business (TaxVox)
  • Tax fraud gang targeted healthcare firms (Krebs on Security)
  • File IRS Form 1040X to correct old tax mistakes (Don’t Mess With Taxes)
  • IRS failing to audit high-value electing large partnerships (Tax Analysts)
  • George Botic to join Chairman Doty’s office as special advisor (PCAOB)
  • Legendary baseball manager Joe Torre and CohnReznick LLP team up on new national advertising campaign, “Game Changer” (CohnReznick)
  • ProSystem fx Knowledge Coach's audit software technology granted US patent (Wolters Kluwer, CCH)
  • H&R Block and Xero form strategic alliance in the US (Xero)

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