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 Analysts and tax lawyers were studying the damage to deals currently
in the works and the outlook for future such deals, in which U.S.
companies escape high taxes at home by shifting their domiciles
abroad.
Although the new rules will make some deals costlier and others more
difficult, fast-food chain Burger King Worldwide Inc said it will
proceed with its $11.5 billion transaction with Canada's Tim Hortons
Inc.
"This deal has always been driven by long-term growth and not by tax
benefits," the two companies said in a statement.
Corporate deal-makers were surprised by harsher-than-expected
changes to the inversions rulebook unveiled by the Treasury
Department late on Monday. Inversions have surged this year and
caused concern in Washington about the threat they pose to the U.S.
corporate income tax base.
Rule changes include blocking what the Treasury dubbed "creative"
strategies to move cash around or to bring overseas profits into the
United States without paying U.S. taxes, and redefining inversions
to make shifting tax domiciles more difficult.
Effective immediately, the rules will mean little for companies that
have already inverted. But for at least 10 companies in the midst of
completing deals, and for those considering inversions, the impact
could be significant.
Tax experts said the rules would have the biggest impact on
companies that invert to gain lower-cost access to unrepatriated
profits, or earnings held overseas to avoid U.S. taxes.
Burger King was not in this situation, said Ken Kies, managing
director of Washington tax lobbying firm Federal Policy Group. "It
really depends on whether or not a favorable tax treatment of
unrepatriated earnings was a key aspect of the economics of your
deal," he said. "If it wasn't, then what they've done here won't
have much of an impact."
Still, most pending deals could become more costly for the buyers.
They include AbbVie Inc and its $54.7 billion deal to acquire
Ireland's Shire Plc, as well as Medtronic Inc and its $42.9 billion
takeover of Covidien Plc.
Neither of those transactions, the biggest of the year, was expected
to fall apart completely, partly because paying a break-up fee to
walk away would likely be even more costly. AbbVie would have to pay
Shire a $1.6 billion penalty if it were to renege on their merger
agreement, for instance.
Medtronic has a contract that lets it or Covidien walk away from
their deal if the U.S. Congress changes tax law. The Treasury’s new
rules fall short of that, so a break-up fee likely would loom in
this case, too, if the merger were called off.
Experts said companies would likely scrutinize the new Treasury
rules for potential legal challenges, but that they could not count
on the rules being overturned.
CHALLENGES POSSIBLE
With a grid-locked Congress failing to act, investors had been
expecting an Obama administration clamp-down on inversions. But the
rules it announced were farther-reaching than anticipated, analysts
at Deutsche Bank said.
An inversion typically involves a U.S. company buying a smaller,
foreign rival and reincorporating in its home country, where taxes
are lower, opening a range of options for the combined business to
lower its U.S. and global tax bills.
About 50 such deals have taken place since the early 1980s, but the
pace has picked up, with half of them completed since the 2008-2009
credit crisis, according to a Reuters review.
One of the new Treasury rules will prevent inverted companies from
using "hopscotch" loans that allow them to avoid dividend taxes when
tapping tax-deferred foreign profits.
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Another rule bars inverters from gaining access to offshore profits
by using "decontrolling" strategies that restructure foreign units
so they are no longer U.S.-controlled.
The Treasury is also tightening limits on the levels of ownership
that former U.S. investors can retain in an inverted company for it
to qualify for foreign tax treatment under U.S. law, a move that
will make doing the deals more difficult.
Finally, new rules would restrict "skinny down" and "spinversion"
restructuring strategies that companies use to try to get around
existing restrictions on inversions.
The U.S. Treasury has acknowledged that one rule, which officials
said was "relatively small," is broad enough to hit even companies
that are not inverting. A senior official said some cash transfers
from non-inverted foreign corporations to U.S. subsidiaries could
now be taxed.
Treasury officials said any deals completed as of Monday were not
affected, while deals completed later would be.
Legal experts said companies would have more leeway to challenge the
rules if they had been applied retroactively, which the Treasury
decided not to do. But the rules will still be scrutinized, said
Eugene Scalia, a lawyer at Gibson, Dunn & Crutcher who has
successfully challenged other federal rules.
"When a federal agency says it's acting because Congress won't, that
always raises the question whether the agency has proper authority
under current law," Scalia said.
Bankers and analysts said they expect more action on tax inversions
from the Obama administration.
"This move is a good and necessary start toward discouraging
corporate inversions, which cost U.S. taxpayers billions in lost
revenue," said Thomas Hungerford, a tax expert at the Economic
Policy Institute, a think tank.
SHARES DIVE
In London, AstraZeneca, which had been the target of a failed
inversion bid by U.S. drugmaker Pfizer Inc, slid 3.6 percent. The
Treasury rules were seen as possibly deterring Pfizer from making
another bid after a $118 billion takeover attempt failed in May.
AbbVie closed down 2 percent in New York, while Pfizer, the biggest
U.S. pharmaceutical company, dipped 0.4 percent. Burger King closed
down 2.7 percent.
AbbVie officials had no immediate comment.
Other U.S.-listed issues under pressure from the Treasury actions
included Abbott Laboratories, down 2.1 percent; Covidien, down 2.5
percent, and Medtronic, down 2.9 percent.
(Additional reporting by Dan Burns and Alison Frankel in New York,
Ben Hirschler in London, Lisa Baertlein in Los Angeles, Solarina Ho
in Toronto, Jason Lange and Emily Stephenson in Washington; Editing
by Leslie Adler and Dan Grebler)
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