Law Times

Law Times • June 13, 2016 Page 9 www.lawtimesnews.com The attack on inversions BY GABRIELLE GIRODAY Law Times H illary Clinton's talking about them. Barack Obama's talking about them. Donald Trump has even weighed in with his similar distaste. Everybody's talking about in- versions — often casting them in an unfavourable light — but are inversions all bad? Inversions hit the main- stream earlier this year, painted by critics as a practice that was allowing large multinationals to dodge paying taxes in the Unit- ed States. "Corporate inversions are a tax loophole that allow U.S. companies to avoid paying U.S. taxes by relocating — on paper — to a foreign country," accord- ing to the White House. "In a typical inversion, a U.S. company acquires a smaller company based in a foreign country — usually a low-tax country — and then locates the residence of the combined company in that other country for tax purposes. Companies typically invert on paper for tax purposes without moving their actual operations overseas. That means they continue to enjoy the benefits of being a U.S. com- pany, including access to U.S. markets, rule of law, patent and intellectual property enforce- ment, support for research and development, and — not least — American workers." In a highly publicized move in April, the U.S. Treasury Department announced it was introducing regulations aimed at stopping inversions. Casualties of the announcement included the scrapping of a pro- posed US$160-billion merger between U.S. company Pfizer Inc. and Irish company Aller- gen PLC. The spinoff effects didn't stop there. Corrado Cardarelli, a senior tax partner and chairman of the tax group at Torys LLP, says the new regulations have impacts for Canadian companies with subsidiaries in the United States. He says the changes mean "a shift in the way debt equity rules have been understood and applied." "This is really a big shift from the judge-made rules that we understood to these new pro- posed complex regulations, so it makes it harder to finance U.S. subsidiaries, it increases the risk of debt in those U.S. subsidiaries re-characterized as equity," says Cardarelli. "Lots of care and at- tention has to be paid to these new rules." High-profile inversions in- volving Canadian companies include a $1.7-billion deal in 2013 between U.S.-based Endo Health Solutions and Montre- al's Paladin Labs, which then set up in Ireland, through a holding company known as New Endo. There was also the $2.7-billion deal that hit the headlines in January of this year, between Progressive Waste Solutions, headquartered in Toronto, and Texas-based Waste Connec- tions. The companies have said the deal will still proceed despite the new regulations. John Lorito, a partner and head of the tax group in Stike- man Elliott LLP's Toronto office, says inversions have actually provided an opportunity for Ca- nadian companies. "A recent one that I worked on, the Canadian company was going through a process looking to maximize value for its share- holders, and by doing a transac- tion with a U.S. company, that could be done as what I'll call a 'good inversion,' [it] allowed the U.S. company to get tax benefits from that transaction that it may not have been able to otherwise get," he says. "Therefore, that indirectly creates more value for the Cana- dian company, because without acquiring the Canadian com- pany, they weren't able to access these tax benefits." Cardarelli says it's been pub- licized that certain U.S. compa- nies have chosen to have sub- sidiaries in countries with lower rates of taxation, such as the Netherlands or Luxembourg. "The minute you bring it back to the U.S., you have to pay 35-per-cent tax, so they've kept it offshore. By inverting, the U.S. company is now owned by a foreign company, and you can move your foreign operations to that foreign company, so those operations don't have to run through the U.S.," he says. But there's been a grow- ing discontent with the prac- tice in the United States. The U.S. Treasury Department, for example, did not mince words when outlining how com- panies use inversions to cut the amount of tax they're paying in the United States. "After a corporate inversion, multinational corporations of- ten use a tactic called earnings stripping to minimize U.S. taxes by paying deductible interest to their new foreign parent or one of its foreign affiliates in a low- tax country," said a statement from the Treasury Department. Lorito says that while inver- sions have received a bad rap in the U.S from politicians, there's a different take north of the border. "From a Canadian perspec- tive, if a Canadian participates in the U.S. inversion, the Cana- dian company is not escaping any Canadian tax obligations, it has the same obligations after as it did before. And really, there's no particular tax benefit to the Canadian company doing the inversion; all those benefits go to the U.S. company that's involved in the inversion. So, from a Ca- nadian company perspective and a Canadian fiscal perspec- tive, government perspective, they're fairly neutral transac- tions," he says. Cardarelli says the U.S. has been challenging inversions since about 2014, to make it harder for companies to invert and more difficult for compa- nies to obtain the benefits. "They've been trying to do things with regulations rather than legislation," says Cardarelli. "That has been the last, really bad consequence of the U.S. kind of clamping down on in- versions, that they've introduced these so-called debt equity rules, regulations that will make it harder to create debt." Cardarelli says that can mean new challenges for Canadian companies that are not invert- ing but "trying to do the same thing they've always been able to do in terms of creating debt in the U.S. group." "Because of these changes that are going to be effective . . . Canadian corporations that have U.S. subsidiaries and have been financing them with debt have to begin analyzing these complex new rules, which a) will make it harder to create debt, and b) cre- ate more stringent documenta- tion requirements for that debt," says Cardarelli. "That's the advice we're giv- ing Canadian corporations, 'You know, be careful, because things you thought you could do to cre- ate debt in the U.S. group you may not be able to do anymore, or not successfully.'" LT FOCUS Corrado Cardarelli says new American reg- ulations aimed at curbing inversions have impacts for Canadian companies with U.S. subsidiaries. Check out lawtimesnews.com for insight from our regular online columnists Monica Goyal discusses the latest gadgets and trends in legal technology in Bits & Bytes From trade deals to foreign investment, Patrick Gervais keeps you up to date on business issues in Trade Matters Darcy Merkur brings a plaintiff-side perspective on insurance matters in Personal Injury Law Platinum Sponsor Silver Sponsor Bronze Sponsor Hosted in Partnership With Date: Sept. 8, 2016 Location: Arcadian Court, Toronto 6 p.m. Cocktail Reception 7 p.m. Gala Dinner and Awards Presentation Keynote Speaker: Brian Zubert, Director, Thomson Reuters Labs - Waterloo Region Dress: Business Attire Innovation. 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