Bramwell’s Lunch Beat: The Deals Within Tax Inversion Deals

Jason Bramwell
Staff Writer and Editor
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PCAOB plans 2014 vote on naming engagement partner
Tammy Whitehouse of Compliance Weekwrote on July 3 that the Public Company Accounting Oversight Board (PCAOB) plans to vote by the end of the year on whether to adopt a new auditing standard that would give investors more information about exactly who is responsible for the audit opinion they rely on to make investment decisions.

The PCAOB updated its standard-setting agenda to indicate it will vote sometime between now and the end of December on its transparency initiative, or a standard that would require audit firms to somehow disclose the name of the engagement partner who oversees an audit, as well as other participants in the audit who are not with the principal audit firm.

The proposal would allow investors to see which engagement partners are responsible for which audits, and it would help them understand the extent to which the audit firm relies on outside resources to perform the audit.

The board accepted comments on the new proposal through mid-March. “The staff is drafting an adopting release for the board's consideration that takes into account comments received on the reproposal, including comments related to liability and alternative locations for the disclosure,” the PCAOB said in its updated standard-setting agenda, according to the article.

Acquirers plot escape from a turn on taxes
Company executives may not flaunt the tax benefits that come with some overseas deals, but their importance is coming through loud and clear in the fine print of merger documents, Dana Mattioli of the Wall Street Journalwrote on Sunday.

Inversion deals – in which a US company buys a foreign target and adopts its home country's domicile and lower tax rate, or establishes a holding company in a country with a low tax rate – have become bigger and more popular lately. But the recent effort by companies, such as Pfizer Inc. and Medtronic Inc., to lower their taxes through these deals has sparked outcry from US lawmakers, some of whom are threatening to change the rules to limit the tax advantage of these tie-ups.

To protect themselves, companies increasingly are adding details to merger agreements that allow them to walk away from a deal without paying a penalty, or breakup fee, should the tax advantage suddenly be taken away, Mattioli wrote.

Such detailed language regarding inversions shows just how important tax benefits are in many overseas deals, despite efforts by many executives to play down taxes as a reason for an acquisition.

Mattioli noted that the easy outs in deal agreements are especially important because companies pursuing inversion deals recently have been offering prices sometimes 50 percent above their targets’ share price, more than double the average deal premium last year for US acquisitions of public companies, according to Dealogic.

If Walgreen goes Swiss and pays less taxes, then it shouldn’t influence US politics
Another inversion deal possibly in the works centers around Walgreen Co., the largest drugstore chain in the United States, which may move its headquarters to Switzerland as part of a merger with European drugstore chain Alliance Boots. In a July 7 column published by the Christian Science Monitor, Robert Reich wrote that if Walgreen becomes a Swiss corporation – and gets to pay less taxes – then it shouldn't be able to influence US politics.

“By treaty, the US government can’t (and shouldn’t) discriminate against foreign corporations offering as good if not better deals than American companies offer,” he wrote. “So if Walgreen as a Swiss company continues to fill Medicaid and Medicare payments as well as, say, CVS, it’s likely that Walgreen will continue to earn almost a quarter of its $72 billion annual revenues directly from the US government.

“But as a foreign corporation, Walgreen should no longer have any say over the size of those payments, what drugs they cover, or how they’re administered,” Reich continued. “In fact, Walgreen should no longer have any say about how the US government does anything.”

EU tax inquiry widens to include Amazon’s operations in Luxembourg
Tom Fairless of the Wall Street Journalreported on July 4 that a European Union (EU) inquiry into the tax treatment of some multinational firms has spread to Amazon’s operations in Luxembourg and other companies operating there, according to a person familiar with the matter.

European regulators said last month they had opened formal investigations into the tax practices of three major corporations operating in three European countries: Apple Inc. in Ireland, Starbucks Corp. in the Netherlands, and a division of Fiat SpA in Luxembourg.

The Financial Timesreported on Friday that the tax investigation included Amazon.

Luxembourg has also been questioned by EU antitrust authorities about its tax arrangements with Microsoft Corp. and McDonald’s Corp., Bloombergreported on Friday.

The real Internal Revenue scandal
There is a scandal going on at the IRS, but it has nothing to do with Lois Lerner or her missing emails, so says the New York Times editorial board. The real scandal is what Republicans did to cripple the agency when virtually no one was looking. Since the broad Tea Party-driven spending cuts of 2010, the agency’s budget has been cut by 14 percent after inflation is considered, leading to sharply reduced staff, less enforcement of the tax laws, and poor taxpayer service.

The editorial board noted that in 2013, the IRS audited only 24 percent of returns that were more than $10 million, compared with 30 percent in 2010. Of returns reporting between $1 million and $5 million, it audited 16 percent in 2013, compared with 21 percent in 2010.

“That is great news for the nation’s highest-income taxpayers, many of whom donate generously to Republican politicians to keep their taxes low. They are getting their money’s worth from lawmakers who debilitate revenue collection while claiming to be deeply worried about the budget deficit,” the op-ed stated.

“But it is bad news for building roads, keeping the air clean, protecting the nation’s security, and countless other vital government tasks. Revenue collected by IRS enforcement actions has fallen by more than $4 billion over the last four years, according to a new report from the Center on Budget and Policy Priorities. And every dollar spent on enforcement yields $6 in additional revenue. Many IRS computers use obsolete Windows XP operating systems and cannot keep up with a growing problem of identity theft that is directing refunds to criminals.”

SEC’s final pay rules are coming any day: Will they be enough to level playing field?
In the latest post for her blog, re: The Auditors, Francine McKenna wrote about the upcoming final US Securities and Exchange Commission (SEC) rules on disclosures of CEO-to-worker pay ratios, which is mandated by the Dodd-Frank Act.

She cited a Bloombergarticle from March 2013 that measured the divide between CEO compensation and rank-and-file workers at 204 – a number that represents the average multiple of CEO pay to the rest of us. The gulf between the two has grown by 20 percent since 2009, according to the Bloomberg data.

McKenna said the SEC finally issued its proposal for its final pay rules last September, and public comments were due by December 2, 2013. She expects the final rules to be released any day now.

She also cited a 2012 research paper from Steven Kaplan, a University of Chicago Booth School of Business professor of entrepreneurship and finance, that compares S&P 500 CEO pay in 2010 to 1993 and finds CEOs have fared roughly as well as the top baseball players, but not so well as basketball and football players over that time period.

“The analogy strikes me as out of the strike zone,” McKenna wrote. “CEOs are certainly good at swinging for the fences. A .350 batting average in baseball is considered pretty good. But few CEOs can hit a wide receiver 30 yards out and I’d like to see the one who can dunk or consistently make a three-point shot.

“Professional athlete paydays are based on the supply and demand for extraordinary athletic abilities and primarily cued to individual performance measures. Some have sweeteners for team accomplishment that even superior athletes can only drive toward but not totally control,” she continued. “Some CEOs may think they’re Bo Jackson but maybe they should get paid more like a utility infielder, capable of playing several positions fairly well, hitting singles and doubles consistently, and blessed with an ability to avoid too many unforced errors. That seems fair and much less obnoxious.”

Quick Links:

  • KPMG not sure if it should sue itself over spectacularly failed client (Going Concern)
  • Hey folks, let’s help EY name their new audit tool! (Going Concern)
  • When taxes and profits are oceans apart (New York Times)
  • State and local groups call on Congress to fix the Highway Trust Fund (Washington Post)
  • Highway fund running on fumes (The Hill)
  • Conservative groups take the IRS to court (The Hill)
  • New IRS Chief John Koskinen: ‘I enjoy a crisis’ (NPR)
  • Grant Lois Lerner immunity in IRS case (Arizona Republic)
  • Audit the IRS! (New York Post)
  • Fear the IRS? No, fix it (Miami Herald)
  • IRS help line is out of service (TaxVox)
  • IRS OVDP vs. streamlined: What to do? (Forbes)
  • Seinfeld’s 10 enduring lessons – about the IRS (Forbes)
  • The real cost of summer vacation: Don’t get buried in taxes (Forbes)
  • City taxes trip up investment advisor restructuring (Forbes)
  • How to tap an IRA early without a tax penalty (Wall Street Journal)
  • JPMorgan and Danske among funds exposed to Gowex fraud (Bloomberg)
  • States are getting more of our money. How? Hint: Tax collectors want us to keep shopping (Don’t Mess With Taxes)
  • Top 10 tax havens for Australian taxpayers (Don’t Mess With Taxes)


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