America's clampdown on tax inversions

The US government has issued new rules making it harder for American companies to cut their tax bill by relocating their headquarters.

President Barack Obama's administration has issued new rules to tackle the tax inversion loophole'. This is the practice whereby US firms merge with foreign peers and move their headquarters overseas to lower their domestic tax bill and put foreign earnings beyond the reach of the US taxman.

The tweaks make it harder for a deal to qualify as an inversion, and for firms to access their foreign cash without it being taxed. The government has acted unilaterally, as Congress is split on tax reform.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

What the commentators said

The US government "has rained on the parade of UK companies that have attracted transatlantic interest based on the portability of earnings and cash as well as strategic rationale", said Alison Smith in the FT.

So shares in drug giants Shire and AstraZeneca "shivered" this week, on fears that their respective US suitors AbbVie and Pfizer might walk away from bids.

Advertisement
Advertisement - Article continues below

The Shire deal "looks the safer bet" given AbbVie's emphasis on the strategic fit. Pfizer, by contrast, is unlikely to be able to afford its quarry now that costs are set to rise.

But how effective is this clampdown really? Lawyers at Wickersham & Taft LLP, cited by The Wall Street Journal, reckon "most companies should be able to navigate the [changes] and complete a successful inversion with proper planning".

A key stumbling block is that, with Congress at loggerheads on the issue, it is impossible for the Treasury to stop such deals happening altogether. Don't expect that to change, said James Moore in The Independent. "Congress finds difficulty in agreeing on anything more substantial than a lunch menu let alone complex rules on corporation tax."

Advertisement

Recommended

Visit/516944/why-wall-street-has-got-it-wrong-again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Visit/economy/us-economy/600841/apples-coronavirus-warning-wont-be-the-last-but-will-markets-care
US Economy

Apple’s coronavirus warning won’t be the last – but will markets care?

If one of the world's biggest companies is feeling the pain from the coronavirus, then presumably others are too, says John Stepek. That can only lead…
18 Feb 2020
Visit/economy/inflation/600799/federal-reserve-inflation-money-printing
Inflation

Here’s why the Federal Reserve might print more money before 2020 is out

The Federal Reserve wants to allow US inflation to run “hot” for a while. But that’s just an excuse to keep interest rates low – and possibly print mo…
10 Feb 2020
Visit/economy/us-economy/600747/its-still-inflation-or-bust-as-far-as-the-fed-is-concerned
US Economy

It’s still “inflation or bust” as far as the Fed is concerned

The latest interest-rate meeting of the US Federal Reserve has confirmed what markets already knew – central banks are pursuing "inflation or bust” po…
30 Jan 2020

Most Popular

Visit/investments/stockmarkets/600878/coronavirus-pandemic-financial-markets
Stockmarkets

A global coronavirus pandemic seems inevitable – are markets still too complacent?

Coronavirus is going global. It’s only a matter of time before it’s classed as a pandemic. John Stepek looks at the markets’ reaction, and explains ho…
24 Feb 2020
Visit/investments/property/buy-to-let/600849/come-back-buy-to-letters-all-is-forgiven
Buy to let

Come back buy-to-letters, all is forgiven

The government is winning its war against small private buy-to-let landlords. But who benefits?
23 Feb 2020
Visit/economy/600875/money-minute-24-february-house-prices-unemployment-and-corporate-results
Economy

Money Minute 24 February: house prices, unemployment and corporate results

Money Minute: previewing the week's most important economic and financial goings on, including the latest house price, and unemployment figures, and …
24 Feb 2020
Visit/517625/tr-european-growth-trust-why-investors-shouldnt-overlook-europe
Sponsored

Why investors shouldn’t overlook Europe

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, tackles investor questions around Europe’s economic outlook and the conseq…
6 Nov 2019