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Reject AirTouch-Vodafone 'Shell Game' to Avoid Tax Obligation, Communications Workers Urge I.R.S.
American taxpayers shouldn't have to subsidize the purchase of AirTouch Communications by the British company Vodafone, the Communications Workers of America declared in urging the Internal Revenue Service to deny AirTouch's request for a waiver of I.R.S. rules to make the acquisition tax-free for shareholders.
In a letter to I.R.S. Commissioner Charles O. Rossotti, CWA President Morton Bahr charged that Vodafone and AirTouch structured the deal - the first foreign purchase of an American telecommunications company - "in a way to skirt tests (under U.S. tax law) which are designed to protect and compensate American taxpayers from expatriation of the U.S. corporate tax base."
The companies are engaged in "transparent manipulation" of funds and assets, Bahr stated, to dodge around the I.R.S. "50 percent test" and the "substantiality test" in order to make it a tax-free deal. Failure to pass the tests means that AirTouch shareholders would pay capital gains taxes at the time of the purchase.
The companies already tried to slip around the "50 percent test" by offering AirTouch shareholders a small amount of cash, $9 a share, in what otherwise is a stock transaction - a maneuver designed to keep AirTouch investors from owning more than 50 percent of the merged company. The payment would knock their share down to 48 percent. "Clearly the companies would have preferred an all-stock transaction, but they threw in cash to create a loophole in the tax laws," said Bahr.
But now the companies have another problem with the "substantiality test," which requires that a foreign purchaser have a greater market value than the domestic company being acquired. AirTouch will be almost $4 billion bigger at the time of the merger, CWA estimates, and that's why AirTouch is asking the I.R.S. for a special waiver of the substantiality test.
CWA warned that Vodafone and AirTouch have disclosed a contingency plan in the event they don't get the I.R.S. waiver. Instead of Vodafone paying the $9 in cash as part of the sale, the $9 will be paid by AirTouch as a dividend immediately prior to the merger, allowing AirTouch to shed $5.1 billion in market value and thus slip under the threshold of the substantiality test.
"This is nothing but a shell game to circumvent our tax laws and get American taxpayers to help subsidize, to the tune of hundreds of millions of dollars, a deal that does nothing to promote competition or to meet the goals of the 1996 Telecommunications Act," Bahr stated.
AirTouch operates in 13 foreign countries, with overseas operations accounting for 40 percent of its revenues - revenues that are partly subject to U.S. taxes, CWA noted in its filing with the I.R.S. After the merger, the combined companies will operate in 23 countries, and they expect after-tax cost savings of $330 million, to be achieved partly by "application of global best practices," or shifting earnings to areas of the world with the most favorable income-tax treatment, CWA stated.
CWA represents 630,000 members in telecommunications, cable TV, journalism, broadcasting, publishing, airline passenger service, and the public sector.
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In a letter to I.R.S. Commissioner Charles O. Rossotti, CWA President Morton Bahr charged that Vodafone and AirTouch structured the deal - the first foreign purchase of an American telecommunications company - "in a way to skirt tests (under U.S. tax law) which are designed to protect and compensate American taxpayers from expatriation of the U.S. corporate tax base."
The companies are engaged in "transparent manipulation" of funds and assets, Bahr stated, to dodge around the I.R.S. "50 percent test" and the "substantiality test" in order to make it a tax-free deal. Failure to pass the tests means that AirTouch shareholders would pay capital gains taxes at the time of the purchase.
The companies already tried to slip around the "50 percent test" by offering AirTouch shareholders a small amount of cash, $9 a share, in what otherwise is a stock transaction - a maneuver designed to keep AirTouch investors from owning more than 50 percent of the merged company. The payment would knock their share down to 48 percent. "Clearly the companies would have preferred an all-stock transaction, but they threw in cash to create a loophole in the tax laws," said Bahr.
But now the companies have another problem with the "substantiality test," which requires that a foreign purchaser have a greater market value than the domestic company being acquired. AirTouch will be almost $4 billion bigger at the time of the merger, CWA estimates, and that's why AirTouch is asking the I.R.S. for a special waiver of the substantiality test.
CWA warned that Vodafone and AirTouch have disclosed a contingency plan in the event they don't get the I.R.S. waiver. Instead of Vodafone paying the $9 in cash as part of the sale, the $9 will be paid by AirTouch as a dividend immediately prior to the merger, allowing AirTouch to shed $5.1 billion in market value and thus slip under the threshold of the substantiality test.
"This is nothing but a shell game to circumvent our tax laws and get American taxpayers to help subsidize, to the tune of hundreds of millions of dollars, a deal that does nothing to promote competition or to meet the goals of the 1996 Telecommunications Act," Bahr stated.
AirTouch operates in 13 foreign countries, with overseas operations accounting for 40 percent of its revenues - revenues that are partly subject to U.S. taxes, CWA noted in its filing with the I.R.S. After the merger, the combined companies will operate in 23 countries, and they expect after-tax cost savings of $330 million, to be achieved partly by "application of global best practices," or shifting earnings to areas of the world with the most favorable income-tax treatment, CWA stated.
CWA represents 630,000 members in telecommunications, cable TV, journalism, broadcasting, publishing, airline passenger service, and the public sector.
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