Insiders Selectively Exploit Inversion Rules
Corporations frequently rely on insiders with government experience, both to avoid costly regulations and to prevent their competitors from doing the same.
According to Bloomberg, corporate lawyers doing temporary stints with government agencies often play a key role in devising rules for corporate inversions — in which a U.S. company acquires a foreign firm in order to move its headquarters into a lower-tax jurisdiction — then go on to exploit loopholes in those rules upon their return to the private sector.
“The top ranks of the U.S. tax administration have swapped staff with industry for decades,” and while the practice gives the government access to top legal talent at relatively little cost, critics are concerned that “some government lawyers may continue to sympathize with corporate interests, or be swayed by former colleagues.”
Bloomberg features the example of Hal Hicks, a tax lawyer who spent four years (2003-2007) working on inversion regulations for the IRS before returning to the private sector, where he took a job at a law firm engineering inversions for corporate clients.
“Hicks’s tenure coincided with a temporary lull in inversions,” the article says, largely due to a 2004 anti-inversion law that Congress adopted in response to “a flurry of deals in the early 2000’s.” Implementation of the law was left to Bush administration tax lawyers, including Hicks, who “in some cases…sought to temper the law’s effect.” (RELATED: Survey: Most Voters Oppose Unilateral Executive Action on Inversions)
In one instance, Hicks “successfully pushed for a rule that any company with at least 10 percent of its business in a foreign country could establish tax residence there,” although the rule was rolled back for being “too lax” shortly after his departure.
Hicks also supported a proposal, this time unsuccessfully, “to eliminate the tax that shareholders of U.S. companies reincorporating overseas are required to pay,” known as an exit tax.
Soon after returning to the private sector, Hicks played a role in two inversion deals affected by those rules.
The first involved oil rig operator Ensco International, “which could have easily passed the 10 percent test,” but found itself on shakier ground once Treasury decided to abandon that rule and judge inversions on a case-by-case basis. Eventually, “Ensco completed the reorganization, and soon three other U.S. companies carried out the same type of inversion.”
Hicks also “helped put together a deal that would do even more to trigger the next wave of inversions,” pioneering a strategy to allow Valeant Pharmaceuticals get around the exit tax he had failed to repeal.
The strategy, which Hicks called “skinny down distribution,” involved temporarily reducing the value of the U.S. firm to take advantage of the fact that “the exit tax applies only to companies that took the legal address of a smaller foreign partner.”
However, insiders with government connections are also useful to corporations seeking to stymie inversions by their competitors, the Wall Street Journal reports. (RELATED: Why Won’t the Obama Administration Talk About Warren Buffett’s Burger King Corporate Inversion?)
Earlier this year, in an effort to prevent a hostile takeover by rival Pfizer, U.K. pharmaceutical company AstraZeneca “hired Wall Street advisers with close ties to the Obama administration,” to lobby against corporate inversions, which “Pfizer wanted to use to make its proposed deal more lucrative.”
Botox-maker Allergan has also sought help from the administration as it tries to avoid a hostile takeover by Valeant Pharmaceuticals, the company that completed an inversion using Hicks’ “skinny-down distribution” strategy.
Those lobbying efforts, the Journal says, “were among the factors that led the Obama administration to fight the inversion trend that has swept through the mergers-and-acquisitions world this year.” (RELATED: Treasury Department Seeks to Discourage Corporate Inversions with New Regulations)
“Mr. Obama and other top officials for months openly discussed their distaste for tax inversions, but did little to deter them apart from calling for congressional action” until business executives began to warn the administration that “dozens more U.S. companies could invert within months if the administration didn’t intervene.”
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