The inversion is alive and well!
Shares of telecom and cable TV equipment maker ARRIS Group (ARRS) soaring today on news it’s buying British set-top box maker Pace for $2.1 billion. Why? Because Suwanee, Georgia-based ARRIS plans to do an “inversion,” basing the new company in Britain and thus reducing considerably its U.S. tax burden. ARRIS saying the move will drop its non-GAAP tax rate to 26%-28%.
In recent months, Washington has been blasting U.S. firms for using inversions in order to pay less to Uncle Sam. Back in September, the Treasury Department issued new rules in an effort to discourage the practice. Those rule changes led pharmaceutical company AbbVie (ABBV) to call off what would have been the biggest-ever inversion-- its $55 billion purchase of Ireland’s Shire.
But Yahoo Finance Senior Columnist Michael Santoli thinks officials really haven’t done very much to sour companies on the idea.
“[Officials] made it less appealing basically by being noisy about it and try to shame the companies into not doing it,” he argues. “That was really the only way they did it. That wore off to some degree-- at least for these guys to strike a deal.”
Rob Cox, U.S. Editor at Reuters, doesn’t really see why the companies should be shamed, anyway.
“It’s the law, they are following the law,” he says. “The real problem is there is no actual tax reform that would make this unpalatable from a financial perspective.”
Santoli agrees, and isn’t holding his breath waiting for Congress to step in.
“It doesn’t seem like there is going to be any comprehensive tax reform package where you might have had more tangible restrictions on tax inversions coming into play,” he says. “In fact, GE’s (GE) recent move where they were shedding their financial liabilities, bringing all those profits back overseas, was kind of a signal that maybe nothing big is going to happen there.”
Santoli also points out it doesn’t appear ARRIS was solely motivated by the tax incentive.
“In theory it makes some kind of sense to be based in the U.K.,” he explains. “It’s not as if they’re going out and finding only the minimum-size company that would qualify.”
Cox thinks the math certainly makes sense.
“If I could swap my 42% tax liability today for a 26% tax liability tomorrow legally, then why wouldn’t I,” he asks. “It would be the right thing to do for your fiduciary duty to your shareholders.”
And Cox believes the real issue isn’t that companies try to avoid taxes, it’s that the system actually encourages them to do it.
“I don’t think it’s wrong what they’ve done,” he says. “It’s just a shame the tax code gives them an incentive to do this.”