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.
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.
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.”