Will InBev Imbibe a Large U.S. Tax Break?

Reports that InBev's acquisition of Anheuser-Busch will generate a large interest expense deduction for the Belgian company may be overstated.

Tucked away in the various reports about the acquisition of the St. Louis-based Anheuser-Busch Companies by Belgium’s InBev NV, is an interesting tax-related issue. In the Wall Street Journal’s regular “Breaking Views” column, the author reckons that the debt that InBev would need to incur to acquire Anheuser-Busch would be so large that it would generate some $2 billion of interest expense each year.

That would mean that with a “reported” tax rate of approximately 40 percent, Anheuser-Busch, if it incurred the acquisition debt, would pay enough interest expense to produce an annual tax savings of approximately $800 million. As a result, InBev’s return on its investment in Anheuser-Busch, once the tax savings are accounted for, would exceed the American company’s “cost of capital” — the theoretical hurdle for a “successful” acquisition.

It is certainly possible to arrange the deal so that the debt that will finance the stock acquisition will be incurred by Anheuser-Busch itself. If that is the case, and Anheuser-Busch becomes primarily liable for the debt incurred, the transaction will be treated for tax purposes as a redemption — as if Anheuser-Busch itself acquired the stock from its shareholders in exchange for the borrowed funds. (See Revenue Ruling 78-250, 1978-1 C.B. 83.)

The tax code, particularly Section 162(k)(1), states that, except as otherwise noted, no deduction is allowed for any amount paid or incurred by a corporation in connection with the reacquisition (i.e., redemption) of its stock. Fortunately, the same provision (Section 162(k)(2)(A)(i)) carves out exceptions to that rule, including an exemption under Section163, which specifically deals with interest expense paid or accrued on indebtedness. So it would seem that Anheuser-Busch would be able to keep its large interest expense deduction. However, there is another tax rule to consider before that happens.

“Earnings Stripping” Rules

If the Anheuser-Busch buyout debt is guaranteed by InBev, even on a deeply subordinated basis, then the so-called “earnings stripping” rules would limit Anheuser-Busch’s ability to freely deduct its interest expense. To be sure, a portion — perhaps even a substantial portion — of the $800 million tax savings referred to in the Journal might not be realized.

The earnings stripping rules are found in Section 163(j) of the tax code and provide that “if this subsection applies to any corporation for any taxable year” no deduction shall be allowed for “disqualified interest” paid or accrued by such corporation during such taxable year. 1 This subsection applies to any corporation for any taxable year if: such corporation has “excess interest expense” for such taxable year (in fact, the amount of interest expense disallowed as a deduction shall not exceed the corporation’s excess interest expense for the taxable year)2; and the corporation’s ratio of debt to equity, as of the close of the taxable year, is equal to or greater than 1.5 to 1. 3


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