The Obama administration on Thursday issued new rules aimed at reducing the tax benefits available to companies that move their tax addresses overseas. It said it would limit the ability of a US company to establish itself as the parent firm in another country and to “stuff” assets into that entity to meet the required ownership limits to make a deal effective.
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Credit Suisse analyst Vamil Divan noted that the new Fact Sheet still didn’t provide any new guidelines on earnings stripping, a practice that inverted companies use to avoid US taxes on overseas cash – through tax-deductible loans issued from the foreign parent to the USA company.
Treasury secretary Jacob J. Lew said: “This next action makes it even harder to invert, and further reduces the tax benefits for U.S. companies”.
“Only legislation can decisively stop inversions”, he said.
Market Pulse Stories are Rapid-fire, short news bursts on stocks and markets as they move. Visit MarketWatch.com for more information on this news. On Thursday, Lew added rules that, among other restrictions, limit “the ability of U.S. companies to inflate the new foreign parent corporation’s size” to evade earlier merger restrictions, and constrain the merged company from transferring a few operations to the new foreign parent to avoid United States taxes. This arrangement also shows that Pfizer’s management plans to remain in control, at least in the short term, even if the deal is technically structured so that Allergan buys Pfizer. Pharma companies are among the largest users of offshore tax havens, according to a recent report by Citizens for Tax Justice.
Looming in the background was the deal being negotiated by pharmaceutical giant Pfizer with Ireland-based drugmaker Allergan, a deal that could prove to be one of the biggest inversions yet.
Read said: “We’re looking at opportunities and when we make our decision as to what is the best way of enhancing value, we will move”. But the laws can be circumvented, in particular by having multinationals combine with an existing company in a low-tax jurisdiction and then placing the headquarters of the new combined company there.
Lee Sheppard, contributing editor of Tax Analysts’ Tax Notes and a specialist in taxation of multinational corporations, said the federal statute governing tax inversions is weak. Pfizer already knew that was risky territory; those were the types of inversions targeted by the Treasury a year ago.
“While we intend to take additional action in the coming months, there is only so much the Treasury Department can do to prevent these tax-avoidance transactions. They pulled their punches”, said Steven Rosenthal, a senior fellow at the Tax Policy Center. He said he’s hopeful the guidance will keep companies from renouncing their US citizenship just to dodge taxes, but said it won’t work to truly stop inversions without help from lawmakers. Treasury has struggled to write new rules on this under present law, said tax experts.
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The deal would result Pfizer to domicile in Ireland. Yes, Pfizer will save $2 billion a year in taxes, but it is giving up 43% of its company to do it. That means 43% of Pfizers earnings, or almost $6.3 billion, will now be going to Allergans former shareholders.
