April 8, 2016

The Tax Man Cometh

The Tax Man Cometh

It’s been quite a week in the world of global finance. First, the “Panama Papers” exposed a virtual underground network of tax shelters set up by one Panamanian law firm to shield the assets of world leaders and other super-well-heeled individuals. I had actually thought about opening a bank account in Panama until I found out what the US ATM charges would be for cash withdrawals. Talk about problems! And then the U.S. Treasury issued new rules to put U.S. corporations out of the international tax inversion business. It’s not easy being rich these days (just ask the 1% of the 1%), or at least, it’s not easy keeping your riches safe from prying eyes and government fingers. Look at David Gunnlaugsson, who was prime minister of Iceland until Tuesday, when it was revealed that he and his wife tucked away a fortune in the British Virgin Islands and lied about it. By the way, how do you make a fortune (legally) being a prime minister? No one will be surprised if he is just the first to lose his privileged office under the delusion that he is somehow above his country’s tax laws.

More than 200,000 companies and 14 thousand offshore clients of Mossack Fonseca, the law firm in question, were exposed by the leak, ranging from an African diamond mogul to “close associates” of Russian President Vladimir Putin to a bunch of South American soccer stars. I bet there are a lot of nervous people around the world about now.

The other out-sized shoe that dropped this week fell on Pfizer and Allergan, scuttling the merger deal that would have moved the tax address of the largest U.S. pharma company to Ireland, in a perfectly legal tax strategy. Desperate not only to stem the revenue loss from this one enormous transaction, but also to keep other U.S. companies from taking their tax streams offshore, the Treasury’s new rules effectively lower a merged foreign entity’s book value (by excluding three years of merger activity) in order to increase the shareholder ownership ratio, in turn triggering the company’s U.S. tax liability.

It is the U.S. government’s no-holds-barred gambit to stop the Pfizer-Allergan deal in its tracks (although Allergan now has an extra $150,000,000 courtesy of the breakup fee provision of the deal), in the absence of new legislation. With no possibility of Congressional action, Treasury put a stake in the sand that Ian Read, Pfizer’s CEO, called “ad hoc and arbitrary,” “unprecedented, unproductive and harmful to the U.S. economy” in an op ed for the Wall Street Journal. I’d say he’s pretty upset.

Whether you agree with him that corporate tax inversions are an appropriate and responsible tax strategy for U.S. multinationals, or you sympathize with those who would be left to make up the revenue shortfall, one thing is clear. This was a bad week for offshore tax strategists. It just goes to show that the old truism is still true. There’s no escaping the only two things in life that are certain – death and taxes. We’ve all got to pay the piper one way or another. Ten days left until April 18, everybody. Happy tax day.