Inversion loophole puts U.S. tax policy in a jackpot

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A merger between America’‍s top slot machine manufacturer and Europe’‍s biggest gaming operator will create a gambling giant that manages lotteries and slots networks worldwide — and adds to the urgency for a political crackdown on U.S. companies seeking to avoid domestic tax obligations.

Italy’‍s GTECH plans to buy Las Vegas-based International Game Technology in a $4.7 billion deal announced Wednesday morning and set to close early in 2015. The newly merged company will be headquartered, for tax residency purposes, in the United Kingdom, a corporate reorganization that will lower the new company’‍s corporate tax obligation.

That strategy, known as “inversion,” has drawn the ire of politicians on both sides of the Atlantic. This week, the White House weighed in, saying deals like this one — and the one announced Monday by Cecil-based Mylan Inc., which plans to reorganize in the Netherlands after its $5.3 billion acquisition of Chicago-based Abbott Laboratories’ generic unit — amount to tax-avoidance schemes.

On Tuesday, U.S. Treasury Secretary Jack Lew asked Congress to overhaul the business tax code to prevent other companies from following suit. And Wednesday, he made a more public argument during an appearance on CNBC.

“We should have some economic patriotism here,” Mr. Lew said on the program. “It’s not right [for] an American firm to benefit from all the things that we do in the United States to make it a safe place to do business but [have them] say, ‘I don’t want to pay taxes here.’ ”

The administration wants to limit inversions by requiring shareholders of the selling company to own at least 50 percent of the new company, up from 20 percent now. Legislation to accomplish that has been introduced in the Senate, but some Republicans have said they prefer to address tax inversions as part of a broader, comprehensive tax overhaul package that will take time to develop.

Senate Finance Chairman Ron Wyden, D-Ore., doesn’t want to wait.

“This inversion loophole must be plugged,” he said Wednesday. “As the speed of inversions increases, this will only fuel bipartisan urgency to stop companies from deserting the U.S.”

In a statement, Sen. Bob Casey, D-Pa., said it’‍s “simply unacceptable that major corporations can reap the benefits of operating in the United States while evading paying their fair share by ‘headquartering’ on paper overseas. … The gimmicks that some major corporations are using to shield themselves from paying their fair share is insulting to Americans who are playing by the rules.”

The U.S. has a corporate tax rate of 35 percent, one of the highest in the world. Already, dozens of firms have reincorporated overseas in the past decade and more appear to be scrambling to before Congress has a chance to crack down.

IGT and GTECH are the latest partners to do so. IGT’s chief financial officer told The Wall Street Journal that the new company’‍s effective tax rate would fall from the high-30-percent range to the mid-30-percent range after the deal closes, but also said that the lowered tax bill was not a principal driver behind the merger.

Rather, the slots industry’‍s saturation domestically — and gambling’‍s growth opportunities in developing countries and online — helped prompt this deal, and others like it. Last year, Bally Technologies agreed to buy SHFL Entertainment for $1.3 billion. Also last year, Scientific Games Corp. completed its acquisition of WMS Industries Inc. for $1.5 billion.

GTECH and IGT both have significant business footprints domestically, and in Pennsylvania.

IGT runs server-based interactive slot machines at The Meadows Racetrack and Casino in Washington County, and its popular Wheel of Fortune machines and other slots populate casinos across the state, including at Rivers Casino. IGT manufactures and distributes about two-thirds of the slots machines in the U.S. and at least half of those in operation in Pennsylvania’‍s casinos.

GTECH, meanwhile, has previously won contracts to monitor Pennsylvania’‍s slots bets at the Harrisburg end, and to supply terminal-based games for the Pennsylvania Lottery (that supply contract was later canceled). It was also in the running to fully take over management of the state lottery, but it dropped out of the race after it became clear that Britain’‍s Camelot Global Services was the front-runner. The privatization plan was ultimately dropped.

The marriage of a lottery manager and a slots manufacturer makes sense, said Israel Posner, executive director of the Lloyd D. Levenson Institute of Gaming at Richard Stockton College in New Jersey. While the two companies don’‍t currently overlap, the line of demarcation between casinos and lotteries is eroding. In Maryland, for example, the lottery and the state’‍s casinos are monitored by a single industry.

In Ohio, racetrack “slot” machines are actually video lottery terminals, all connected to each other. And many states utilize video terminals to sell lottery tickets.

“It was clear that it was all morphing,” Mr. Posner said Wednesday. At a recent industry conference, “a lot of the talk was [about whether] there is really a difference in the eyes of the consumer between a lottery and a casino.”

While the regulatory bodies that monitor the two industries are often separate, the technologies that make them run “are not distinguishable,” he said.

Analysts gave mixed reviews to the proposed merger.

“There are limited revenue synergies, given little overlap in GTECH and IGT’s products and customer bases, although management sees product diversification as a key benefit,” according to a note to investors from Goldman Sachs.

Other analysts were more optimistic on the deal — even if revenue synergies don’‍t materialize, the merged company could save $125 million in “corporate activities,” $85 million in manufacturing and distribution costs, and $20 million in research and development expenses over three years, according to Macquarie Capital analysts.

Mr. Lew, on CNBC, suggested the administration wants to act quickly in a manner that makes companies think twice before consummating such a deal.

“If we can’t get comprehensive business tax reform done, we need to act on this question of inversions,” he said on CNBC. “We need to do it now and we need to do it retroactively so businesses don’t rush to do these transactions.”

Bill Toland: or 412-263-2625. Tracie Mauriello: or 703-996-9292.

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