Bramwell’s Lunch Beat: Mylan/Abbott Labs’ ‘Spinversion’ Deal

Jason Bramwell
Staff Writer and Editor
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Ernst & Young to pay fine in lobbying case
Floyd Norris reported on Monday for New York Times DealBook that Ernst & Young (EY) agreed to pay more than $4 million to settle accusations from the US Securities and Exchange Commission (SEC) that it violated audit-independence rules by lobbying on behalf of two of its audit clients.

The SEC case, which involved lobbying by the firm’s subsidiary Washington Council EY, did not identify the audit clients and did not indicate that any action had been taken to review the audits. An SEC order in the case did not indicate that any members of the audit teams were aware of the independence violations, Norris wrote.

“Auditor independence is critical to the integrity of the financial reporting process,” said Scott W. Friestad, associate director in the SEC’s Division of Enforcement. “When an auditor acts as an advocate for its audit client, that independence is compromised. Ernst & Young engaged in lobbying activities that constituted improper advocacy and clearly violated the rules.”

The accusations indicated that the lobbying took place between 2000, when EY acquired the lobbying firm, and 2009. EY spokesman John La Place said in a statement that “auditor independence is of paramount importance to EY” and that the firm had “voluntarily decided to cease performing lobbying work for SEC registrant audit clients” in 2012, according to the article.

[Click here to read the release from the SEC.]

The new, new trend in M&A: Spinversions
If you hadn’t had enough of the hottest trend in mergers and acquisitions – inversions – now we have the “spinversion.” Mylan Inc. on Monday said it agreed to buy a portion of Abbott Laboratories 's generic pharmaceuticals business in an all-stock transaction valued at $5.3 billion.

As Stephen Grocer of Wall Street JournalMoneyBeatwrote, the big driver of this deal is once again Corporate America’s pursuit of lower taxes. And while this deal is structured as a tax inversion, it comes with a slight twist: Instead of buying an entire company headquartered in a country with a lower tax rate and redomiciling there, Mylan is purchasing just a business unit, which is now being called a spinversion.

Under the deal’s structure, Abbott will receive about a 21 percent stake of a newly formed entity that will combine Mylan’s existing business and Abbott’s generic pharmaceuticals business in all developed markets except the United States. The new entity will be organized in the Netherlands, enabling the company to benefit from a lower tax rate. Mylan expects its global effective tax rate to move from 25 percent to approximately 21 percent in its first full year, and then expects that it will come down further to the high-teens over time, Grocer wrote.

[For some additional reading, New York Times DealBooktalked to Mylan’s chief executive, Heather Bresch, daughter of Senator Joe Manchin (D-WV), about the tax implications of the deal with Abbott Labs.]

AbbVie nears $54 billion Shire deal
In what would be one of the largest so-called inversion deals, US drug maker AbbVie Inc. is close to clinching a deal to buy Dublin-based Shire PLC for more than £31 billion ($53.6 billion), Hester Plumridge of the Wall Street Journalwrote on Monday.

Shire said yesterday it had received a revised offer from AbbVie of £53.20 a share over the weekend. Shire said it would be willing to recommend the deal to its shareholders subject to “satisfactory resolution of the other terms of the offer.”

Plumridge wrote the two sides are negotiating a breakup fee for the deal, as well as discussing management positions and other governance issues, according to a person familiar with the talks.

If Shire agrees to a deal, North Chicago, Illinois-based AbbVie plans to base the new combined company in the United Kingdom to benefit from its lower corporate tax rate. The move is part of a wave of US health care companies looking to take advantage of European deals to lower their taxes.

Tax considerations appear to be the primary driver in AbbVie's courtship of Shire, Plumridge noted. The companies have little overlap in their respective businesses, limiting likely cost synergies. Shire's tax rate on its income, measured by non-US accounting standards, was 17 percent in the first quarter, though Irish corporate tax rates tend to be lower than those in the United Kingdom. AbbVie's was 22.3 percent, adjusted for asset amortization and certain other costs.

US stands to lose big from corporate tax inversions
The Joint Committee on Taxation estimated that the United States would receive an additional $19.46 billion over a decade if most new tax inversions were essentially halted with proposed changes to the tax code, Joseph Walker of the Wall Street Journalwrote on Monday.

The figure is based on estimates from previous inversions, in which US companies make overseas acquisitions to gain tax advantages, and doesn't take into account deals being made now, including Mylan’s $5.3 billion stock purchase of Abbott Laboratories.

Tax experts say that calculating how much the US Treasury would lose is nearly impossible because of a dearth of reliable tax data from companies' public filings and the variables in how companies can structure their businesses, Walker wrote.

House approves IRS budget cuts
Cristina Marcos of The Hillreported that the House of Representatives late Monday night adopted proposals by voice vote to cut funding for the IRS.

An amendment to the fiscal 2015 Financial Services appropriations bill by Representative Paul Gosar (R-AZ) would cut funding for the IRS by $353 million. Specifically, Gosar's amendment would cut that funding from the IRS enforcement account and use it toward deficit reduction, Marcos wrote.

Gosar argued that funding for the IRS would be better used toward reducing the deficit than toward the agency caught in GOP crosshairs. Representative Jose Serrano (D-NY), the top Democrat on the House Appropriations Financial Services subcommittee, said that slashing IRS funding would be counterproductive and result in weakened tax enforcement. He noted that the $10.95 billion allocation for the IRS would be a $341 million cut from fiscal 2014.

Marcos wrote that like with other appropriations bills, the Financial Services measure is being considered under an open rule that allows members to offer an unlimited number of amendments with 10 minutes of debate each. Consideration of the contentious Financial Services appropriations bill is expected to last through Wednesday.

An amendment offered by House Ways and Means Committee Chairman Dave Camp (R-MI) to cut the IRS budget by another $2 million was also adopted by a voice vote.

Statement of NTEU National President Colleen M. Kelley on House approval of deep cuts in IRS funding
Here is a statement released on Tuesday from Colleen Kelley, president of the National Treasury Employees Union (NTEU), the union representing IRS employees, on the House’s voice vote on Monday night:

“Acting to score political points, the Republican-led House of Representatives last night took a bad bill and made it much worse when it slashed more than $1 billion in funding from the IRS. If enacted into law, the measure would sharply undercut the ability of the IRS to service taxpayers and collect the revenue needed to fund the government. The White House has threatened to veto this counterproductive legislation, an action NTEU would support. The Statement of Administration Policy said the bill, even before the cuts, would ‘hinder IRS efforts to provide robust service to taxpayers, improve enforcement operations, and implement new statutory responsibilities. Further, these reductions would impact efforts aimed at deficit reduction, as funding for IRS enforcement activities returns many times its cost in the form of increased revenue collections.’

“The $1.14 billion in cuts, approved by voice vote in amendments to HR 5016, the Financial Services and General Government Appropriations Act, would be on top of $341 million in cuts in the bill sent to the House floor by the Financial Services Committee.

“In the past four fiscal years, the IRS budget already has been cut by $1 billion, leading to the loss of 10,000 employees and sharply reduced services to taxpayers, including the elimination of tax return preparation. I find it particularly discouraging that elected officials would engage in political gamesmanship at a time when the pressing need is to rebuild the IRS and its workforce, not seek to starve it of the resources it requires to meet its mission. The IRS collects 93 percent of all government revenue, so every American suffers when the IRS cannot perform its mission for lack of resources.”

NASCAR tracks rev up lobbying for tax break
Racetrack owners are revving up their efforts to protect the “NASCAR tax break” from critics who portray it as pure corporate pork, Bernie Becker of The Hillwrote on Tuesday.

The provision, which allows motorsports tracks to use a shorter depreciation schedule, is among the more than 50 tax preferences that expired at the end of 2013 after Congress failed to pass a so-called “extenders” bill.

Fiscal watchdogs say the motorsports tax break, enacted in 2004, is the kind of narrow giveaway that gives the US tax code a bad name, and lump it in with other extenders provisions that support the Puerto Rican rum industry and thoroughbred horses, Becker wrote.

Allowing racetracks to write off costs over a seven-year span lets them pour money back into their businesses, racetrack advocates say, spurring economic growth in individual communities around the country. Advocates also say the price for that spark is small, compared to others, and argue an extension would give tracks the certainty they need to plan improvements, according to the article.

The Senate’s proposal to extend the current write-off schedule for racetracks for two years would cost about $71 million over a decade, and is part of a broader, $85 billion package to restore dozens of expired tax breaks.

Citigroup to get tax silver lining in $7 billion settlement
The Wall Street Journal’s Michael Rapoport and Christina Rexrode wrote for MoneyBeat on Monday that Citigroup Inc. will get a tax break on at least part of its $7 billion settlement with the government over its mortgage securities that went bad.

The costs incurred in providing $2.5 billion in assistance to distressed homeowners and other consumer relief will be tax deductible, the bank and outside experts said yesterday. So will the $500 million Citigroup is paying to state attorneys general and the Federal Deposit Insurance Corp. (FDIC). The $4 billion fine the bank is paying to the US Justice Department will not be deductible, however, Rapoport and Rexrode noted.

Under the law, fines and similar penalties imposed on companies as part of a settlement can’t be deducted on a company’s tax return, but other amounts can be deducted, as ordinary business expenses.

Citigroup CFO John Gerspach confirmed on a conference call with reporters that the state AG and FDIC payments would be deductible, along with any costs Citigroup actually incurs in relation to consumer relief, which could be less than the $2.5 billion amount of relief in the settlement, according to the article.

Tax deductibility of banks’ big settlements with the government became an issue last fall, when J.P. Morgan Chase & Co. reached a $13 billion settlement with the government over similar issues and acknowledged that $7 billion of that amount would be deductible.

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Quick Links:

  • Make Internet access tax ban permanent (The Hill)
  • Advocates see hope in plan to raise federal gas tax to keep Highway Trust Fund going (Roll Call)
  • As the AbbVie-Shire and Mylan-Abbott tax inversions show there really is a Laffer Curve (Forbes)
  • Tax reform, not tax inversions, will rescue the US pharma, bio, and medical-device industries (Forbes)
  • Back to school sales tax holidays begin soon for many states (Forbes)
  • Reynolds-Lorillard merger will create just the kind of monster tax authorities love (Forbes)
  • Tax cuts coming to India, finance minister says (Forbes)
  • Does the real IRS ‘Dirty Dozen’ include their own targeting, rogue agents, lost emails and more? (Forbes)
  • Hidden cash or hidden bitcoin discovery is windfall to IRS too (Forbes)
  • Time criticizes IRS for EO ‘rubber-stamping’ (Tax Analysts)
  • The man who took on the IRS before the tea party grumbled (CNBC)
  • Old-fashioned amended return filings could cost IRS billions (Don’t Mess With Taxes)
  • Kansas tax policy, causes and coincidences (Kansas City Star)


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