Yesterday, the Treasury Department announced a new set of rules, effective immediately, meant to curb tax inversions—the controversial deals in which U.S. corporations move their addresses overseas for tax purposes by buying a smaller foreign company. There's a decent chance the government's efforts will have some teeth, at least to judge by investors' reactions.
Inversions have been all over the news lately thanks to Burger King’s decision to buy Tim Hortons and move to Canada, as well as a spate of deals in the pharmaceutical and medical device industry. Burger King's plan to move north seems to be moving full speed ahead, but as soon as the Treasury rolled out its new regulations, health stocks started dropping. Reuters reports that the “move could jeopardize” Illinois-based AbbVie’s deal to buy Shire and decamp to the United Kingdom; both companies saw their share prices tumble yesterday. Medtronic, which has a merger lined up that would potentially move it to Ireland, saw its stock fall as well, and “may become one of the biggest losers,” according to Bloomberg. The rule changes are also dampening investor hopes that Pfizer would make another attempt to merge with U.K.-based AstraZeneca. Both of those stocks tumbled, too. "Inversion deals now are clearly going to be very difficult to pull off," Navid Malik, head of life sciences research at securities firm Cenkos, told Reuters.
So, what are these new rules? The changes are designed to both make inversions harder to execute and less profitable tax-wise. For instance, when an American company buys a foreign target and inverts, its old shareholders aren’t allowed to own more than 80 percent of the newly combined corporation. Some U.S. companies sidestepped that rule by paying out a huge dividend to shrink themselves right before their merger—now they won’t be able to do so. The Treasury is also taking steps to clamp down on “hopscotch loans,” which some inverted companies have used to access their foreign profits without paying any U.S. taxes on them.
Some doubt, however, that Treasury’s new regulations will have much of an effect on the eight inversion deals that are currently in motion. “These rules do not strike anything like a mortal blow to the pending deals,” corporate tax consultant Robert Willens told his clients, according to Bloomberg. He wrote that Medtronic and AbbVie should wrap up their mergers “without missing a beat.”
Still, given that the Treasury’s moves are essentially fallback measures meant to compensate for the president’s inability to pass anything through Congress that would block inversions, it's impressive that they’ve still thrown so many of these deals into question.