LONDON International pressure to curb corporate tax avoidance is behind delays to a $35 billion merger of French advertising group Publicis and U.S. rival Omnicom, and could even scupper the deal, tax advisers and sources close to the deal said.
Last July, Paris-based Publicis and New York-headquartered Omnicom announced plans to create the world's biggest advertising group. The new company would be registered in the Netherlands and tax resident in the UK.
However, on Wednesday Omnicom Chief Executive John Wren said the Dutch and British tax authorities had, "unexpectedly" so far failed to approve the arrangements, which Omnicom said last year would save $80 million a year in taxes. Wren added that if the UK and the Netherlands did not approve the structure, the whole deal was at risk since "there is no Plan B", though Publicis said on Thursday it was confident the deal would still proceed.
Securities analysts said they were blindsided by the problems, and one source close to the deal said that an anti-tax avoidance strategy being pushed by the Group of 20 most powerful economies was making it more difficult to get such approvals.
Tax advisers with experience of putting similar deals together said that historically the Dutch and UK tax authorities had been flexible in approving such a structure. This is because it would not mean a loss in tax for either the UK or the Netherlands, given that the two companies' headquarters are currently in the U.S. and France.
Indeed, the arrangement would traditionally be welcomed by the UK and the Netherlands because it would likely bring in some tax revenue and support jobs.
But a second source close to the deal said the two tax authorities had not reacted as expected.
"Tax authorities are not working together to find a solution. They are fighting rather than cooperating and lack of cooperation between the UK and Dutch authorities is endangering the deal," the source said, adding there was a real risk the deal could collapse as a result.
And the other source said the G-20's anti-tax avoidance strategy, known as the "Base Erosion, Profit Shifting" (BEPS) program, which is being managed by the Organization for Economic Co-operation and Development(OECD), was having an impact on the deal.
"The entire current BEPS discussion is getting a lot of attention from the Dutch Ministry of Finance, and in the UK, " the source said. "Things now take longer," he added.
PUBLIC, PEER PRESSURE
The Dutch and British tax authorities declined to comment on the Publicis-Omnicom case, citing rules on taxpayer confidentiality.
But a spokesman for Her Majesty's Revenue and Customs, the British tax authority, added: "The UK is committed to tackling aggressive tax planning and harmful tax practices and is actively engaged in the OECD's work to look at the international tax rules, which have not kept pace with the changing nature of business".
Omnicom and Publicis did not return calls seeking further comment on the hurdles the deal was facing.
Lawyers who have previously worked with companies moving their domiciles said tax authorities were beginning to take a less flexible approach when asked to approve tax-reduction structures. They said that this was a response to public anger over such moves, and the resulting political impetus for the authorities to crack down, as well as the proliferation of tax maneuvers.
Ton Smit, a lawyer with Tax Consultants International in Amsterdam, said "treaty shopping" through which companies chose to establish only a nominal presence in a country to receive the tax-reduction benefits of tax treaties were facing a public backlash.
"The public is quite negative about the Post Office box company market," he said.
Peer pressure was also at play, with countries such as the Netherlands or the UK not wanting to be seen to be helping big companies avoid taxes in allies such as the United States, said Dominic Stuttaford, tax partner with Norton Rose Fulbright in London.
"The UK tax authority is very receptive to inward investment but they also want to make sure that people are not simply exploiting the tax regime," he said. "The Dutch tax authority won't want the U.S. tax authority saying they are not doing their bit to make sure multinational companies are paying their fair share of tax," he added.
The UK and Dutch tax authorities declined to comment on whether they have changed their approach.
The corporate structure planned by Publicis and Omnicom echoes that used when CNH and Fiat Industrial merged to create CNH Industrial in 2013.
Italian carmaker Fiat and its U.S.-based affiliate Chrysler also plan to use a similar structure as part of the full integration of the two companies, due to be completed this year.
The arrangement gives companies the chance to take advantage of Britain's unusual absence of a withholding tax on dividends, Stuttaford said.
Being a UK tax resident is better than Dutch residency for companies with significant U.S. activities because the U.S.-UK tax treaty is seen as more beneficial than the U.S.-Netherlands tax treaty.
Meanwhile, a Netherlands domicile can be more helpful as Dutch corporate rules permit anti-takeover provisions not allowed in the UK and offer more flexible rules on corporate governance matters, lawyers said.
Normally a company is assumed to be tax resident in the country where it is registered but bilateral tax treaties often allow a company with no activities in the country of registration but activities in another to shift its tax residence to the second country.
Yet in the case of the UK-Netherlands tax treaty, this is not a simple box-ticking exercise. Changes in the treaty in recent years, mean the tax authorities now have to go through a "mutual agreement procedure" before a Dutch-registered company can be deemed to be tax resident in Britain, and not the Netherlands.
Tax advisors said they prefer the traditional box-ticking, which is also known as a "tie-breaker", as the mutual agreement can take more than six months to negotiate.
"With a tie-breaker, you have your destiny in your hands," said one lawyer who asked not to be named.
(Additional reporting by Leila Abboud in Paris, Nicola Leske in New York and Anjuli Davies in London; Editing by Martin Howell)