Lew’s tax inversion move: The deals which might suffer
The U.S. government has been promising a crackdown on tax inversion deals for months. Yet the measures announced Monday may not be enough of a disincentive for companies like Pfizer or AbbVie, which are tempted by the savings involved in snapping up smaller foreign rivals and re-domiciling themselves to avoid America’s labyrinthine tax system.
The new rules, aimed at “when possible, stopping” inversion deals, according to the U.S. Treasury, hope to close a number of tax loopholes that make inversion deals possible.
One element will stop companies using so-called hopscotch loans, which allow a redomiciled parent company to access earnings from its foreign subsidiaries in the U.S. without raising its tax bill.
Another would stop inverted companies from transferring cash or property from a “controlled foreign corporation” to their new parent company to avoid U.S. tax.
A further measure stops companies using special dividends and other one-off payments to make sure they come in under the threshold of 80 percent of the combined company, which is needed to make an inversion happen.
These new regulations are an example of efforts across the world to clamp down on companies redomiciling to avoid paying tax in their home country. The Organisation for Economic Co-operation and Development (OECD) announced plans to curb corporate tax avoidance last week.
Under British takeover rules, Pfizer cannot come back with a raised bid for AstraZeneca until Nov. 26. Its previous $118 billion bid was rejected, and it was the furor over this proposed deal that partly led to Lew’s actions.
“Today’s measures do little to negatively impact the economic benefit from the proposed Pfizer acquisition of AstraZeneca,” Andrew Baum, a pharmaceuticals analyst at Citi, wrote in a research note.
Pfizer could still reduce its tax rate from 28 percent to 22 percent post inversion, according to Baum’s calculations.