Bloomberg News - Offshore Cash of $2 Trillion Sparks Hunt for Tax-Friendly Deals

Photographer: Andrew Harrer/Bloomberg

Senator Carl Levin, a Democrat from Michigan. Levin has proposed legislation that could curtail such tax deals. Ron Wyden, the Oregon Democrat who chairs the Senate Finance Committee, said the tax-inversion game won’t ultimately work.

What’s greasing the wheels for the rise in mergers by U.S. companies? The tax man.

Two tax-code quirks -- one that charges U.S. companies when they repatriate overseas earnings, the other that allows them to claim a foreign domicile without moving their senior leadership abroad -- are motivating U.S. companies to buy overseas counterparts in part to lower their bills.

Takeovers by U.S. companies of targets in low-tax environments -- those with a corporate tax rate of below 20 percent -- have doubled in proportion to all overseas deals, according to data compiled by Goldman Sachs Group Inc. analysts. The desire for such an arrangement, known as a tax inversion, is a factor in Medtronic Inc. (MDT)’s $42.9 billion purchase of Covidien Plc (COV)and Pfizer Inc. (PFE)’s more than $100 billion effort to buy AstraZeneca Plc. (AZN)

“If you have a lot of cash trapped offshore, then the potential tax savings are likely to be larger,” said Marc Zenner, co-head of JPMorgan Chase & Co.’s corporate finance advisory group. “With bigger tax savings, you can offer a bigger premium and it’s harder for a target company to say no to an offer.”

$2 Trillion

U.S. companies have almost $2 trillion in profits stockpiled offshore, according to a review of securities filings from 307 corporations reviewed by Bloomberg News.

Medtronic, with nearly $14 billion offshore, agreed to pay about $42.9 billion for Covidien -- itself a tax inversion with an Irish domicile since 2009, while its senior leadership resides in Mansfield, Massachusetts. Ireland taxes corporate profits at less than half the U.S. rate.

Since 2010, U.S. purchases into the low-tax environments accounted for 15 percent of all overseas transactions with a value of $250 million or more, Goldman Sachs’s data show, up from an average of 7 percent in the previous 15 years.

Related: Medtronic Is Biggest Yet to Renounce U.S. Tax Citizenship

Pfizer tried to acquire AstraZeneca in part to change its tax jurisdiction to the U.K., a move that might have cut its tax bills by as much as $1 billion a year. Actavis Plc’s $20.8 billion purchase of Forest Laboratories Inc. -- expected to close this month -- gives the company an Irish tax domicile.

Strategic Sense

While the inversion deals are likely to continue, tax savings wouldn’t be the sole factor driving a buyer, said Ferdinand Mason, a partner at the law firm Jones Day in London.

“It needs to make absolute strategic sense and create value for shareholders in the long term,” he said in a phone interview. “That should still be the number one priority and reason to pursue acquisitions. As the world is becoming more stable and intense cost-cutting strategies come to an end, U.S. companies want to use their big piles of cash sitting abroad to make acquisitions.”

Cross-border deals by U.S. companies reached $117 billion this year so far, data compiled by Bloomberg show -- out of a total of $724 billion in deals struck by companies overall. This total doesn’t include Medtronic’s purchase of Covidien, which is largely based in the U.S., Pfizer’s so-far unwelcome bid for AstraZeneca, or the $54.2 billion offer for Allergan Inc. by rival Valeant Pharmaceuticals International Inc.

While Valeant’s operations are run from Bridgewater, New Jersey -- with its key executives based in the U.S. -- the company’s tax domicile is in Laval, Canada. The effect of its purchase of Allergan would be the same as an inversion deal. Allergan would become part of a company with a corporate domicile in Canada and its overseas profits out of the reach of the U.S. Internal Revenue Service.

“While there are now many negotiations taking place which involve some sort of tax inversion component, there are also lots of hidden jewels yet to be found out there,” said Mason.

EBay Repatriation

Not everyone is trying to change tax jurisdictions. General Electric Co. is seeking to acquire Alstom SA’s energy business for $17 billion -- in a deal that would tap only a fraction of the company’s $57 billion in overseas cash.

And not everyone is eager to dodge the IRS. EBay Inc. (EBAY) said in April it would take a $3 billion charge to potentially return $9 billion in profits to the U.S. -- money that will help it purchase fast-growing startups.

The companies looking to avoid U.S. taxes are drawing attention from lawmakers. PresidentBarack Obama has already made a proposal that would make inversion deals tougher. Currently a U.S. company must buy a foreign company whose market value is at least 20 percent of the combined company. Obama’s proposal would raise that bar to 50 percent.

‘Critical Mass’

Senator Carl Levin, a Michigan Democrat, has proposed legislation that could curtail such tax deals. Ron Wyden, the Oregon Democrat who chairs the Senate Finance Committee, said the tax-inversion game won’t ultimately work.

“It’s clear that America must establish a more efficient and competitive corporate tax rate,” Wyden, who supports retroactive limits as part of a broader revamp of the tax code, said in a statement. “However, any company who is paying U.S. taxes today should expect to pay U.S. taxes for years to come regardless of how they try to game the system.”

Government limits on inversions are a “long shot” in a divided Congress, said Greg Valliere, chief political strategist for Potomac Research Group in Washington. Even a wave of deals following Medtronic’s might not be enough to get the law changed.

“I don’t think this issue has attained critical mass for the tax writers,” Valliere said in an e-mail. “And lest we forget, the House Republicans aren’t inclined to compromise with Democrats on anything, especially not on a measure that would be complicated and time-consuming.”

To contact the reporters on this story: David Welch in New York at dwelch12@bloomberg.net; Manuel Baigorri in London at mbaigorri@bloomberg.net

To contact the editors responsible for this story: Mohammed Hadi at mhadi1@bloomberg.netElizabeth Wollman

Reuters News - Euro zone employment rises, trade surplus grows

A general view of Frankfurt stock exchange March 3, 2014.

CREDIT: REUTERS/RALPH ORLOWSKI

(Reuters) - Euro zone employment rose for the second consecutive quarter in the first three months of the year in a sign the recovery was finally helping the labor market and a widening trade surplus signaled a further positive contribution to growth in April.

The number of persons employed in the 18 countries sharing the euro rose by 0.1 percent on the quarter in the three months to March and was up by 0.2 percent on the year, the first annual rise since third quarter of 2011, the European Union's statistics office said.

In Germany, the euro zone growth engine, employment rose 0.3 percent on the quarter and 0.8 percent on the year. In Portugal, which exited an international bailout in May, employment fell 0.3 percent on the quarter, but jumped 1.8 percent year-on-year.

Employment in Greece rose on the quarter and slowed its annual fall to 0.5 percent from 2.6 percent in the last quarter of 2013, signaling that also the euro zone's troubled periphery was experiencing a gradual recovery in labor markets.

But despite four consecutive quarters of economic growth still 18.7 million people were without jobs in April and the jobless rate remains close to record highs seen last year.

Separately, data showed that net trade made a positive contribution to growth in April as the trade surplus increased to 15.7 billion euros ($21.38 billion), from 14.0 billion in the same period of 2013.

The higher surplus was mainly because imports, down 3 percent year-on-year, slowed more than exports, which fell only 1 percent in April on a non-seasonally adjusted basis.

Economists polled by Reuters had expected the trade surplus to narrow to 13.9 billion euros in April from the originally reported 17.1 billion surplus in March.

EU exports to Russia, with which relations are tense because of Russian annexation of Crimea, fell 12 percent on the year on a non-seasonally adjusted basis in the first three months of the year, Eurostat said.

Imports from Russia, which is the EU's fourth biggest trade partner, fell 9 percent on the year in the first quarter.

($1 = 0.7345 Euros)

(Reporting by Martin Santa)

Reuters News - Japan to cut corporate tax rate below 30 percent within a few years: source

(Reuters) - Japan plans to lower the corporate tax rate below 30 percent within a few years starting from the next fiscal year, a source told Reuters on Thursday, as part of premier Shinzo Abe's package of steps to boost Japan's growth potential.

Abe wants to detail how much Japan will cut the corporate tax rate by in an economic package due this month. However, he has met resistance from his ruling party's tax panel, which has called for assurances on how to fill the gap in tax revenues to ensure Japan does not delay much-needed fiscal reforms.

Japan's corporate tax rate is nearly 36 percent for large companies operating in Tokyo. Private-sector members of the government's top economic and fiscal council have proposed cutting the rate to 25 percent to put it in line with international standards.

Economics Minister Akira Amari met Takeshi Noda, the head of the ruling Liberal Democratic Party's tax panel, on Wednesday night to discuss the plan.

They agreed to clarify in the government's guideline on long-term economic policy, to be issued this month, that Japan will lower the tax rate below 30 percent in stages over several years from fiscal 2015/16, which begins in April, the source familiar with the matter told Reuters on Thursday.

(Writing by Leika Kihara; Editing by Chris Gallagher and Paul Tait)

BBC News - World Bank lowers growth forecast for developing world

The World Bank has revised down its forecast for economic growth in the developing world this year - from 5.3% down to 4.8%.

The World Bank said developing countries, such as India, needed to invest in infrastructure

If right, it would be the third consecutive year of growth below 5% for this group of countries.

The Bank says that developing nations need to make economic reforms to promote growth.

But the new report does predict that growth in these countries will accelerate in 2015.

"Disappointing" is the word the Bank uses to describe the developing world's likely performance this year.

The organisation's president, Jim Yong Kim said these growth rates are "far too modest to create the kind of jobs we need to improve the lives of the poorest 40 per cent."

Temporary effects

However, there are some optimistic elements to the report.

The downgraded forecast reflects the impact of the Ukraine crisis, bad weather in the United States and other factors.

Some of these will be temporary and the Bank expects the developing world to record growth of around 5.5% next year and in 2016, which the report says is "broadly in line with potential," which means the rate of growth that they could sustain.

They will be helped by the stronger growth coming through in many rich countries, notably the US and the euro area.

Questions asked

But Andrew Burns, a senior economist at the Bank and one of the authors of the report, acknowledged that a period of three consecutive years of indifferent performance raises questions about whether the developing world is in for a long period of sub-par performance.

"It's one thing to have one year where one-off factors explain why growth wasn't quite as strong as you anticipated. To have three years in a row where growth disappoints does have to start begging exactly those kinds of questions," he says.

Even the World Bank's new lower forecast for this year would constitute a very strong performance in a developed nation.

But poorer countries can grow faster by adopting established technology and, in many cases, putting an increasing working age population to work.

Mr Burns says these countries should focus on things they can control. So rather than hope for further help from the developed economies, they should push ahead with economic reforms of their own.

The report says: "The structural reform agenda needs to be reinvigorated in order to sustain rapid income growth".

The report mentions energy and infrastructure, labour markets and the business climate as areas where some countries would benefit from reform.

Among the countries it names, India and South Africa are said to need to make efforts in all these areas

By Andrew WalkerBBC World Service Economics correspondent

BBC News - Global private wealth rises to $152tn

The amount of private wealth held by households globally surged more than 14% to $152 trillion (£90tn) last year, boosted mainly by rising stock markets.

The rise in global stock markets has boosted private wealth held by households

Asia-Pacific, excluding Japan, led the surge with a 31% jump to $37tn, a report by Boston Consulting Group says.

The number of millionaire households also rose sharply.

The report takes into account cash, deposits, shares and other assets held by households. But businesses, real estate and luxury goods are excluded.

"In nearly all countries, the growth of private wealth was driven by the strong rebound in equity markets that began in the second half of 2012,"the firm said in its report.

"This performance was spurred by relative economic stability in Europe and the US and signs of recovery in some European countries, such as Ireland, Spain and Portugal."

The amount of wealth held in equities globally grew by 28% during the year, Boston Consulting Group (BCG) said.

Asia-Pacific growth

Economies in Asia have been key drivers of global growth in the recent years. And households in the region have benefitted from this growth.

Within the region, China has been the biggest driver - with private wealth in the country surging more than 49% in 2013.

High saving rates in countries such as China and India has also been a key contributing factor to this surge.

The wealth held in the region is expected to rise further, to nearly $61tn by the end of 2018.

"At this pace, the region is expected to overtake Western Europe as the second-wealthiest region in 2014, and North America as the wealthiest in 2018," BCG said.

The pace of wealth creation in China was also evident in the growth in the number of millionaire households - in US dollar terms - in the country, rising to 2.4 million in 2013, from 1.5 million a year ago.

Overall, the total number of millionaire households in the world rose to 16.3 million in 2013, from 13.7 million in 2012.

According to the report, private wealth in:

• North America rose by 15.6% to $50.3tn
• Western Europe, which includes UK, Germany and France, rose by 5.2% to $37.9tn
• Eastern Europe, which includes Russia, Poland and Czech Republic, jumped by 17.2% to $2.7tn
• Latin America rose by 11.1% to $3.9tn
• Middle East region increased by 11.6% to reach $5.2tn

Reuters News - Indian government sets out investor-friendly reform agenda

India's Prime Minister Narendra Modi (C) walks to speak with the media as he arrives to attend his first Parliament session in New Delhi June 4, 2014.

CREDIT: REUTERS/ADNAN ABIDI

(Reuters) - India's new government will pursue an economic reform agenda that foresees introducing a general sales tax, encouraging foreign investment and speeding approvals for major business projects, the president told parliament on Monday.

Prime Minister Narendra Modi's government will "urgently pursue" reforms to the state-run coal sector to attract private investment, President Pranab Mukherjee told lawmakers elected in Modi's landslide victory last month.

Modi's government also promised to ensure that every Indian family has a good home with uninterrupted supplies of power, by 2022.

(Reporting by Delhi Bureau; Writing by Douglas Busvine; Editing by Frank Jack Daniel)

Bloomberg News - China Regulator Pledges to Expand Credit as Economy Slows

Photographer: Jerome Favre/Bloomberg

Premier Li Keqiang is expanding quotas for securities investments and setting up a free-trade zone in Shanghai, threatening Hong Kong’s position as the global hub for renminbi trading and investment.

China’s banking regulator vowed to expand loans and cap borrowing costs, seeking to boost the supply of funds to the real economy as growth slows amid a clampdown on shadow financing.

Lending to small businesses, major infrastructure projects and first-home buyers will be a priority, the China Banking Regulatory Commission said in a statement today. To give banks more capacity to lend, the regulator may ease the ratio of loans to deposits by including some stable sources of deposits in the calculation, CBRC Vice Chairman Wang Zhaoxing said.

Premier Li Keqiang said in a May 30 State Council meeting that the nation will cut funding costs and maintain reasonable growth in credit as economists forecast the weakest expansion in 24 years. Banks’ quarter-end cash demand to meet with regulatory requirements such as loan-to-deposit ratio and a crackdown on off-balance-sheet lending combined to push interbank lending rates to a record in June last year.

“To revitalize the economy, China needs to adjust the structure of its credit supply, especially when demand from big state-owned enterprises is waning while small private firms have little access to funding,” said Rainy Yuan, a Shanghai-based analyst at Masterlink Securities Corp.

Yuan said the CBRC could start counting some interbank deposits in the loan-to-deposit ratio, giving banks room to expand credit and bolster growth in the world’s second-largest economy.

Limit Leverage

China’s banking law caps a bank’s loans at no more than 75 percent of its deposits to limit leverage. Banks are currently lending about 65 percent of their deposits, and the function of the ratio to prevent credit from overheating will remain unchanged, Wang said at a news briefing in Beijing today.

The country will further increase the credit supply to ease financing difficulties for small businesses, make loan approvals more efficient and lower borrowing costs, Wang said. Policy makers will use tools including open-market operations and the required reserve ratio to adjust liquidity and keep the money-market stable, the CBRC said in its statement.

Lenders are allowed to increase their tolerance of small-business loans that soured, Yang Liping, a CBRC director in charge of smaller national and city commercial banks, said at the briefing.

Yuan Gains

Bank shares declined while China’s currency strengthened. Industrial & Commercial Bank of China Ltd. (1398), the nation’s largest lender, fell 0.8 percent in Hong Kong at 1:35 p.m., while Bank of China Ltd. slipped 0.3 percent. The yuan climbed the most in a week in onshore and offshore trading as the People’s Bank of China raised its reference rate by 0.14 percent to 6.1623 per dollar, the biggest gain since Jan. 10.

The CBRC has tightened regulation from wealth management products to trusts and interbank lending since last year to prevent defaults from spurring market turmoil. So-called shadow banking, estimated by Barclays Plc to be worth $6.2 trillion, pushed up companies’ borrowing costs and made it harder for the government to curtail debt and rein in soured loans.

China’s efforts to deleverage the economy will increase financial risks, and restructuring of industries with too much capacity will cause more nonperforming loans, Wang said. The financial industry’s overall risks are manageable, he added. The CBRC plans to speed up asset-backed securities and bad-loan write-offs to make better use of existing credit, Wang said.

Property Bubbles

The CBRC will also take measures to rein in bubbles in the nation’s real estate market because reliance of the economy on property and too much credit exposure to the sector could damage the financial system, he said.

China’s economy grew 7.4 percent in the first quarter, the least since 2012, and is forecast to expand 7.3 percent this year, the weakest pace since 1990, based on the median estimate in a Bloomberg News survey.

The economic slowdown has hurt borrowers’ ability to repay debt and driven up banks’ bad loans. Nonperforming loans at Chinese lenders increased by the most in the first quarter since 2005 to 646.1 billion yuan ($103 billion) as of March 31, the highest level since September 2008, according to CBRC data.

The State Council, which dictates central bank policy, decided to make “targeted” reserve-requirement-ratio cuts for banks that have lent money to rural borrowers and small companies, according to a May 30 statement on the central government’s website. That followed a reduction for some rural banks in April.

To contact Bloomberg News staff for this story: Jun Luo in Shanghai at jluo6@bloomberg.net; Zhang Dingmin in Beijing at dzhang14@bloomberg.net