Johnson Controls Inc. and Tyco International plc plan to move forward with their proposed merger, despite newly proposed rules by the U.S. Treasury Department and IRS aimed at limiting corporate inversions.
The companies also confirmed they expect to realize $650 million in operational and global tax savings within three years after closing, according to a filing made Thursday with the Securities and Exchange Commission.
The Treasury Department and IRS issued proposed rules earlier this month that would eliminate the tax deductible status of interest payments on intercompany loans, which could be used to reduce the taxes paid in the U.S. by a foreign company in a practice known as earnings stripping. The new rules would also limit the potential benefits of “serial inverting.”
At the time, Glendale-based Johnson Controls and Ireland-based Tyco said they were reviewing the new regulations and declined to comment on the potential impact.
Thursday’s filing confirmed a Morningstar analyst’s prediction last week that the deal would still move forward. Either company would also have faced a $500 million kill fee if it wanted to walk away from the deal because of a change in law and the other company didn’t.
Johnson Controls has also come under fire from presidential candidates for avoiding paying taxes, with Democrat presidential candidate Hillary Clinton saying the company benefited from the 2008 auto industry bailout as a supplier to car makers. National Association of Manufacturers president and chief executive officer Jay Timmons countered that the company has a responsibility to shareholders and not taking advantage of possible savings would be “professional malpractice.”
The two companies have repeatedly said the inversion is not the main reason for their merger. The new combined company will keep the Johnson Controls name but will take up Tyco’s Irish domicile. That move is expected to save up to $150 million in annual taxes.
The companies previously said they also expect $500 million in cost savings to come from the merger.
Johnson Controls chief executive officer Alex Molinaroli has said the two businesses compliment each other with their products — JCI in building efficiency, Tyco in fire and security — and geography — JCI has a particularly strong presence in China while Tyco is strong in Europe.
Molinaroli said Thursday the two companies are track for the merger to close Oct. 1 and reaffirmed the strength of the future partnership.
“My confidence that this powerful combination will create a world leader in buildings and energy technologies with significant strategic value for our customers, employees and shareholders just continues to grow,” Molinaroli said.
