New U.S. Treasury rules to limit corporate 'inversions'

Apr 05, 2016, 8:18 AM EDT
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New U.S. Treasury rules will limit corporate 'inversions,' including the Allergan-Pfizer merger.

Reuters reports:

The U.S. Treasury Department took new steps on Monday to curb tax-avoiding corporate "inversions," with the pending $160 billion merger of Pfizer Inc and Allergan Plc seen as a potential casualty. The changes, less than a year before President Barack Obama ends his term, follow sharp political criticism of Pfizer's and Allergan's merger, which would be the largest inversion deal ever. While the rules did not single out this deal, one of the provisions takes aim directly at it. The companies said they were reviewing the Treasury Department's notice. "Prior to completing any review, we won't speculate on any potential impact,” the companies said in a joint statement.

The Wall Street Journal notes:

“It’s going to be a major impediment. They’re pretty much taking all of the juice out of inversions,” said Robert Willens, a New York-based tax analyst. “They’ve addressed literally every benefit that one attempted to gain from an inversion and shut them all down systematically.” The new rules, the government’s third wave of administrative action against inversions, will make it harder for companies to move their tax addresses out of the U.S. and then shift profits to low-tax countries using a maneuver known as earnings stripping. In an inversion, a U.S. company takes a foreign address, typically through a merger with a smaller firm. The combined company can then lower its tax rates through internal borrowing and can more easily move non-U.S. profits around the world and back to shareholders while avoiding U.S. taxes. Deal lawyers, who have made millions in fees over the past few years advising on inversions, mostly shrugged at the previous two rounds of Treasury rules, which nibbled around the edges but made few major changes. They digested Monday’s announcement with greater alarm, with many saying it was an unexpectedly aggressive move from a Treasury Department that has expressed frustration at the limits of its own powers in curbing these transactions. Several deal makers said the rules seemed squarely aimed at the Pfizer-Allergan transaction, which has drawn fire from politicians in an election year. Partners at tax departments of major law firms were gearing up for a long night parsing the regulations, which run over 300 pages.

Bloomberg writes:

Inversions have become a political flash point, with presidential candidates including Democrat Hillary Clinton and Republican Donald Trump promising to discourage the practice. Democrats in Congress, including New York Senator Charles E. Schumer and Michigan Representative Sander Levin, welcomed the Treasury’s announcement Monday. Republicans have called for addressing inversions in the larger context of international tax reform, which would include lowering the 35 percent corporate income tax in the U.S., which is among the world’s highest.

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