Published: November 16, 2015
Pfizer’s pursuit of British pharmaceutical company AstraZeneca in 2014 prompted the U.S. treasury to tighten the rules governing inversion deals, in which U.S. companies merge with a foreign company and move their legal headquarters to lower-tax countries. The rules, which tightened the requirement that the former American company own less than 80 percent of the new company‘s shares and banned “hopscotch loans” in which newly merged companies send money banked overseas to their American branches without paying taxes on it, did discourage some potential inversions, including a high-profile deal between U.S- based AbbVie and Ireland-based Shire, but it hasn’t stopped them entirely. At least 10 inversion deals have closed since the department issued new rules, and Pfizer announced in October that it was holding preliminary discussions about a deal with Irish firm Allergan. So far, there hasn’t been much reaction from the White house or legislators about the Pfizer news, but Credit Suisse public policy expert Terrence Thompson says it’s “more likely than not” that the Administration will try to tweak the tax code to make inversions even less appealing in the coming months. One possible route: making it more difficult for the American arms of foreign-based multinationals to deduct the interest they pay on debt. After an inversion, the parent company often lends the U.S. branch money, allowing the American company to deduct the interest they pay to the parent company from their tax bills. Thompson notes that such an action would affect all multinational companies that make intercompany loans, as well as discouraging inversions. While Congress would need to take action to ban inversions outright-a step Thompson thinks is politically impossible-the Administration has already shown that is willing to go it alone. Whether, how, or when they might do so remains to be seen, but investors should be prepared for the possibility.
Source: The Financialist