AVP Avon Products Inc

By Theo Francis 

When Avon Products Inc. sells the bulk of its North American operations, it will join a very small club: publicly traded companies based in the U.S. but with little or no U.S. operations.

Only a handful of other large companies have gone the same route in recent years. Among them are Philip Morris International Inc., the international tobacco giant; and Coca-Cola Enterprises Inc., the big soft-drink bottler. And Coca-Cola Enterprises is about to leave the club by merging with two big European counterparts.

Tax experts say the practice is rare for good reason: It isn't very tax efficient. That is because foreign profits earned by U.S. companies are taxed by the U.S. unless companies can credibly argue they have been permanently reinvested abroad. Even then, bringing the resulting cash to the U.S.--for example, to repurchase stock, pay dividends, make acquisitions or for other purposes--triggers a tax bill.

"They're not going to want to have a situation long-term where they've got a U.S. parent with no U.S. operations sitting on top of a foreign operation that appears to be very profitable," says J. Richard Harvey, a Villanova University law professor and former senior accountant in the U.S. Treasury Office of Tax Policy who helped coordinate past government efforts against offshore tax evasion. "You're going to want to do something to get that U.S. parent out of the equation."

Philip Morris International, for example, has maintained its New York headquarters since it split off from what is now Altria Group Inc. in 2008. At the time, PMI took with it what had been nearly two-thirds of the combined company's income; today, all of PMI's income is generated outside the U.S. Bringing those earnings into the U.S. "may result in a residual U.S. tax cost," the company warns investors in its filings.

Avon Products is cleaving off its North American operations into a new company, to be called Avon North America, and will own 19.9% of it. Private-equity firm Cerberus Capital Management LP will own the remainder. In addition, Cerberus will buy preferred shares in Avon Products that could give it 16.6% of the parent company.

In 2014, just over 11% of Avon sales were in the U.S., while almost 48% were in Latin America, Avon said in its latest annual report. All of the company's 2014 operating profit came from outside North America, where the company reported $72.5 million in operating losses.

On a conference call with investors, Avon executives didn't rule out relocating the company. In response to a question from an analyst, who noted that it would help the company not to have to convert foreign sales and profits into U.S. dollars, Chief Financial Officer James Scully said the company will "look at everything."

Still, Mr. Scully said the first priority is to "see how we can align our expense base with...the rest of our business" by shifting expenses into countries with softer currencies.

Coca-Cola Enterprises sold its U.S. operations to Coca-Cola Co. in 2010, keeping only European operations. Last year, 150 of the company's more than 11,000 employees were in the U.S., company filings say, and all sales were in Europe. The company kept its Atlanta headquarters largely to ensure continuity of management, and because most of its investors were in the U.S., spokesman Fred Roselli says.

This year, however, Coca-Cola Enterprises said it would merge with two big European counterparts to form Coca-Cola European Partners Ltd., a London-based company owned 48% by CCE shareholders, finally shedding its American headquarters.

"With the larger scale of the proposed company and all consolidated bottler territories all being in Europe, CCEP will be able to efficiently manage the combined European operations from the U.K.," Mr. Roselli said.

A recent securities filing for the combined company indicates CCE's managers were aware the company's unusual structure was tax-inefficient. The document notes that the new company's London headquarters will make it easier to manage the company's cash, "including access to non-U. S. cash flow with associated financial benefits, as compared to incorporation in the United States."

There are hurdles to moving overseas, even for a company with few or no U.S. operations. The federal government has adopted laws and tax rules designed to make it harder for U.S. companies to escape U.S. taxation with a relocation, also called a tax inversion.

One of the toughest ways to move is a "self-inversion," in which a company simply relocates without merging with a foreign company. For a self-inversion to succeed, the company must show it generates a quarter of its global income, holds a quarter of its assets and employs a quarter of its workforce in the new home country.

Self-inversions are a tall order, but Avon might be able to meet it by relocating to Brazil, for example. In addition to reporting nearly 22% of revenues in Brazil last year, Avon has disclosed that just over 20% of its long-lived assets were there. About 23% of its long-lived assets were in the U.S.

"There's absolutely no reason why Avon shouldn't engage in a self-inversion" if it can, says Robert Willens, a tax and accounting consultant in New York. "It would be very helpful for these guys to finish the job and do a self inversion."

Write to Theo Francis at theo.francis@wsj.com

(END) Dow Jones Newswires

December 17, 2015 16:20 ET (21:20 GMT)

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