The US Treasury Department on Monday tightened the rules around tax inversions, the type of transaction Pfizer is trying to pull off with Allergan.
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In a press conference earlier Tuesday, President Barack Obama connected tax inversions with the release of the so-called “Panama Papers”, which detail how foreign leaders and others have used shell companies in order to avoid taxes or hide funds.
The U.S. needed to stem the rising tide of corporate inversions, so the new Treasury rules are welcome. Trump’s tax reform plan calls for a 15 percent tax rate ceiling for every business of every size in the U.S. He noted, “this lower rate makes corporate inversions unnecessary by making America’s tax rate one of the best in the world”.
His comments come a day after the US Treasury Department announced a fresh crackdown on on tax avoidance deals known as inversions.
“We’re feeling some of the same macro factors to a lesser degree, but there’s a knockdown effect that if Europe is slowing down, that doesn’t necessarily bode well for us”, said Steven Baffico, chief executive at Four Wood Capital in NY. Since Treasury can not establish tax law, Pfizer should be in a strong position with a legal challenge, but that would take several years and walking from the deal is a more likely outcome, arbs said.
Thanking the Treasury Department for its actions given congressional negligence in acknowledging the problem but being unable to pass a law, Obama continued to explain the Treasury Departments actions on Monday.
Both companies are mum on what they’ll do.
The Pfizer deal, the largest proposed inversion in history, was expected to lower the pharmaceutical giant’s tax rate and save the company about $35 billion in taxes.
“No corporation is obliged to run its affairs to maximize taxes it pays the USA government just like none of us are obliged”, he said.
The latest Treasury moves would make inversions less lucrative by eliminating a tax benefit for “abusive” inverters.
Wall Street stocks dropped on Tuesday (Apr 5) on worries about weak first-quarter earnings as drug manufacturer Allergan slumped on new USA tax rules that threaten the drug manufacturer’s takeover by Pfizer. But he again called on Congress to act to halt the practice. These moves, taken by a number of USA companies such as Eaton (ETN) and Seagate (STX), as well as considered by Pfizer (PFE) and Johnson Controls (JCI), have stoked concern over the fairness of the practice.
Inversions, once the province of tax lawyers and corporate analysts, have become part of this year’s presidential campaign. When big multinationals pay less in taxes, the rest of us have to pay more.
Some of the new rules will make it more hard for companies to invert and reduce their opportunities to “strip” their earnings. “I’m not aware of any assets of USA companies [Tyco] has completed in the last three years that would threaten its ability to expatriate [Johnson Controls]”, said Henrietta Treyz of Height Securities in an email.
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This is not the first time a tightening of the US inversion rules have caused a merger to unravel.
