The deal, which has a transaction equity value of $11.8 billion, will mean Cooper shareholders receive $39.15 per share in cash and 0.77479 in ordinary shares, for 29% premium. And by deciding to locate the new, combined company’s headquarters in Ireland rather than in Cleveland, Ohio (the present home of Eaton), Eaton will save $160 million in taxes by 2016, it says. The deal is expected to close in the second half of 2012.
“Incorporating as an Irish company provides significant global cash management flexibility and associated financial benefits,” said the companies’ announcement.
Global power management company Eaton is the latest in a number of relocations away from the US. Aon moved its global headquarters from Chicago to London in January, while hi-tech companies such as Google and Twitter moved parts of their operations outside of the US to take advantage of the Irish tax regime.
Ireland’s 12.5% corporate tax rate and transfer pricing legislation make the country an attractive location for the hi-tech industry which is rich in intellectual property. The high US tax rate (35%) and worldwide system of taxation, with companies being charged to repatriate their foreign earnings, add to the incentives for US companies to look elsewhere when it comes to choosing where to base their global headquarters.
While companies such as Google have been vilified by parts of the media for their decision to use tax planning to minimise their tax bill, it is the US tax system that allows companies to do this, and Google acted within the confines of the US tax code.
Despite the attractions Ireland has to offer, Martin Phelan, head of the practice at William Fry Tax Advisors – Taxand, said US companies will only choose Ireland as a country to locate their expansion business “if Ireland makes sense for them” and warned that the Eaton move should not be viewed as typical.
“They will not go for the sake of it,” said Phelan. “I think this was a unique case where Cooper were already in Ireland so it made sense for Eaton to see if a reverse takeover of Cooper made sense. It did, and the rest is history. I would not see this transaction as a trend setter.”
But, he said, the trend of US multinationals expanding abroad – not just to Ireland – is set to continue. And even if the Eaton move is not a trend setter, it provides a possible blueprint for companies in similar situations who may be analysing the benefits of a reverse takeover, as well as showing that US companies are not content with the country’s tax system.
“The US can’t stop US companies expanding abroad, that trend will continue. If you are a global company then you require structures to facilitate the very fact that you are global,” said Phelan.
In building these structures, tax efficient methods of progressing will of course not go unnoticed.
Spotlight on US reform
Phelan said the US tax system is in need of reform, regardless, and identified one particular aspect of reform which he thinks the US should view as of vital importance.
“What the US needs to reform is the ability to exploit the profits of their US conglomerates in the US by encouraging them to repatriate their overseas profits to stimulate spending, investment and growth in the US, either at the corporate level or the shareholder level – it doesn’t matter as spending is spending no matter who does the spending, what is important is that it is spent in the USA buying domestic products and services,” said Phelan.
Even without the evidence of a handful of companies deciding to move their operational headquarters, taxpayers and advisers in the US almost unanimously agree that the US tax system is not satisfactory and is in need of reform.
“The US needs to adopt tax reform that lowers the rate and broadens the base,” said Jack Mintz, director, school of public policy at the University of Calgary.
Donald Marron, director of the non-partisan Urban-Brookings Tax Policy Center and former member of the President’s Council of Economic Advisers in 2008 and 2009, goes even further, arguing that the system is economically harmful and has deep flaws.
“America’s tax system is a mess. It’s needlessly complicated, economically harmful, and often unfair. And it doesn’t raise enough money to pay our bills. That’s why almost everyone agrees that tax reform should be a top priority. All know our tax system is deeply flawed,” said Marron.
Without reform, the implications could be severe, according to Jason Fichtner, senior research fellow at the Mercatus Center, George Mason University.
“Absent sweeping corporate tax reforms, US competitiveness will continue to languish,” he said. “Inaction will create troublesome results: the foreign outsourcing of economic activity, a further loss of American jobs, the sale of US companies to foreign multinational companies, a further erosion of the corporate tax base, and the continuation of harmful tax policies that are biased against saving, investment, job creation, and economic growth.”
US Congress changed the statutory rules 10 years ago to place tighter limits on companies relocating outside of the US and since then there have been relatively few instances of US companies relocating, but the absence of fundamental reform of the US tax code could prompt more to pack their bags. With the attractiveness of the Irish regime, as well as an increasingly attractive UK regime, more US companies could be set to follow in the footsteps of Eaton and Aon. Pentair and Sara Lee Corp have also already signalled their intentions to move operations away from the US.
“It should be noted that since anti-inversion tax rules came into play in the US over a decade ago most new relocations are actually from Bermuda,” said Declan Butler, of Deloitte Ireland. “For instance, companies that are principally in the oil and gas and related industries that had already migrated, or inverted from the US in and around 2000.”
“Coopers would fit into this category. Having migrated to Bermuda due to uncertainty over future US rules they then relocated to Ireland,” added Butler, saying he does expect the trend of Bermuda-headquartered US groups migrating into Europe to continue and that Ireland is the location of choice.
He puts this down to a combination of factors including the fact that Ireland is a common law country which US multinationals are very comfortable with; the lack of controlled foreign company legislation; the “very good” holding company regime; and the quality of tax, legal and accounting professionals.
Cooper’s legal advisers for the transaction are Wachtell, Lipton, Rosen & Katz and Arthur Cox, while Simpson Thacher & Bartlett, A&L Goodbody and Matheson Ormsby Prentice are acting as Eaton’s legal counsel.