Thursday, October 10, 2013

Cadbury's Tax Plan and Inverse Mergers: More Corporate Tax Planning Enters the Spotlight

     One of the more interesting business reporting trends over the last few years is the focus on corporate tax planning.  I believe this started in conjunction with the investigations by the US and other OECD countries into offshore/tax haven planning mechanisms which has led to some embarrassing tax disclosures.  Regardless of the cause, we are seeing far more actual disclosure about aggressive corporate tax planning techniques.  For example, the Financial Times has recently issued a two part report on Cadbury's tax planning.  

Cadbury, the British confectionery maker that became a cause célèbre for tax justice campaigners after it was acquired by US food group Kraft in 2010, engaged in aggressive tax avoidance schemes before the takeover that were designed to slash its UK tax bill by more than a third.

A Financial Times investigation into the tax affairs of the company – established in 1824 by Quakers and known for its philanthropic ethos – has uncovered tax avoidance schemes former senior executives admit were “highly aggressive”.
Like many multinationals, Cadbury reduced its corporation tax bill by loading operations in high tax countries, such as the UK and US, with debt, while using equity to fund its growth through low tax jurisdictions such as Ireland.

But it went even further by devising schemes to engineer interest charges that could be deducted from its gross profits and reduce UK tax.

     And the New York Times Deal Book recently published an article on the increased use of international mergers as a way to cut corporate tax bills:

From New York to Silicon Valley, more and more large American corporations are reducing their tax bill by buying a foreign company and effectively renouncing their United States citizenship.

“It’s almost like the holy grail,” said Andrew M. Short, a partner in the tax department of Paul Hastings, which advises a number of American corporations on deals. “We spend all of our time working for multinationals, thinking about how we’re going to expand their business internationally and keep the taxation of those activities offshore,” he added.

Reincorporating in low-tax havens like Bermuda, the Cayman Islands or Ireland — known as “inversions” — has been going on for decades. But as regulation has made the process more onerous over the years, companies can no longer simply open a new office abroad or move to a country where they already do substantial business.

Instead, most inversions today are achieved through multibillion-dollar cross-border mergers and acquisitions. Robert Willens, a corporate tax adviser, estimates there have been about 50 inversions over all. Of those, 20 occurred in the last year and a half, and most of those were done through mergers.

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