A top U.S. federal government official said this week Washington is moving quickly to curb a rising number of companies looking to relocate outside the United States in an effort to avoid paying taxes.
“It is imperative that lawmakers get this done,” Treasury Secretary Jacob Lew said in a speech Monday.
The relocation manoeuvre, known as a corporate inversion, is the tactic Florida-based Burger King is using in its bid for Tim Hortons Inc.
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But on Wednesday, the odds that the megadeal could be derailed by new U.S. tax rules stood at exactly 3 per cent, according to one estimate.
“Changes in U.S. tax law do not represent a material adverse change, based on our understanding,” said investment experts at Desjardins Securities. There’s a “97 per cent probability of the deal closing.”
It comes down to timing, among other things.
New rules in ‘very near future’?
Inversions like the kind Burger King is attempting are eroding the U.S. tax base and shifting a greater burden onto individual American taxpayers, Secretary Lew said. To that end, the U.S. Treasury is weighing taking steps in the “very near future.”
But Lew also said it wouldn’t be enough to stamp out the practice, only make it less appealing. New, concrete laws are required that Republicans and Democrats are far apart on at the moment.
A particular point of contention is whether an anti-inversion bill should be retroactive to affect pending deals. Burger King and Tim Hortons said they expect the $12.5-billion merger to close before the end of the year.
New laws that could disrupt the Burger King-Tim Hortons transaction will almost certainly have to be in place before U.S. Republicans and Democrats leave Washington to campaign ahead of mid-term elections in November.
“Only a change in the law can shut the door,” Lew said.
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Still, even if formal changes to the U.S. tax code are made, only the value of the deal would likely be altered, not the deal itself, according to Desjardins analyst Keith Howlett.
“Our understanding is that tax changes are not contractually acceptable reasons for Burger King to fail to close the Tim Hortons transaction.”
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