Forcing US corporations to invest overseas

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That won’t happen in time for the IPO; Goldman told analysts on a conference call last week the 140 million shares Yahoo expects to sell in the deal will be fully taxed. But for its remaining 384 million shares, a loophole recently identified by analysts at Cantor Fitzgerald could help the company avoid paying billions of dollars to Uncle Sam.

The Internet portal holds a portion of its Alibaba shares in Hong Kong, a jurisdiction where share sales are exempt from capital gains taxes, Cantor Fitzgerald said in a July 9 note. That means that after holding its shares one year following Alibaba’s offering – the lock-up period imposed on most pre-IPO shareholders – Yahoo could sell off a portion or all of its remaining shares tax-free.

Of course, in that scenario, Yahoo would have to keep that cash overseas, spend it to acquire a foreign company or else pay taxes to repatriate it to the U.S.

A foreign acquisition could help Yahoo compete with online advertising rivals such as Google GOOGL -1.13%, which generates a higher portion of its ad revenue overseas, Cantor Fitzgerald’s Youssef Squali said in an interview.

“They need to increase their international exposure,” Squali said. “The question is, what can they buy?”

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The United States tax code is fueling Pfizer Inc.’s $98.7 billion bid to take over the London-based pharmaceutical company AstraZeneca. If the deal goes through as proposed, a new parent company in Britain would own the combined entity, making it easier for the new firm to strip income out of its American tax base. The deal is one of several recent transactions known as “inversions,” where a multinational company like Pfizer, based in New York, becomes an expatriate by acquiring a smaller foreign target.

Inversions are especially popular these days for pharmaceutical and biotechnology companies, where most of the value of the company is found in tax-mobile intangible assets. Recent examples include Valeant Pharmaceutical’s acquisition of Biovail, a Canadian company, and Endo Health Solutions’ acquisition of Paladin Labs, another Canadian company. Ireland is another popular haven: the pharmaceutical company Actavis moved to Ireland by way of merger with Warner Chilcott, setting up the expatriation of Forest Laboratories through a merger with the now-Irish Actavis. While the tax treatment of shareholders in the United States in inversions varies — they are sometimes taxed on built-in gains at the time of inversion — the underlying tax motivations for these deals are consistent.

The United States tax code creates two reasons for these sorts of deals: (1) American corporations must pay tax on worldwide income, not just income in the United States, and (2) American corporations may defer tax on most income from foreign sources until the income is repatriated to the United States.

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