The U.S. government has been promising a crackdown on tax inversion deals for months. Yet the measures announced Monday may not be enough of a disincentive for companies like Pfizer or AbbVie, which are tempted by the savings involved in snapping up smaller foreign rivals and re-domiciling themselves to avoid America's labyrinthine tax system.
The new rules, aimed at "when possible, stopping" inversion deals, according to the U.S. Treasury, aim to close a number of tax loopholes that make inversion deals possible.
One element will stop companies using so-called "hopscotch" loans, which allow a redomiciled parent company to access earnings from its foreign subsidiaries without raising its tax bill. Another would stop inverted companies transferring cash or property from a "controlled foreign corporation" to their new parent company to avoid U.S. tax. A further measure stops companies using special dividends and other one-off payments to make sure they come in under the threshold of 80 percent of the combined company, which is needed to make an inversion happen.
"Today's measures do little to negatively impact the economic benefit from the proposed Pfizer acquisition of AstraZeneca."
These new regulations are part of efforts across the world to clamp down on companies redomiciling to avoid paying tax in their home country. The Organisation for Economic Co-operation and Development (OECD) announced plans to curb corporate tax avoidance last week.
Yet questions remain over whether the measures will have the effect Treasury Secretary Jack Lew desires – making some already mooted deals "no longer make sense". Although the plunge in the share prices of AstraZeneca, Shire and Smith & Nephew, all potential or actual targets for tax inversion-related deals, in trading on Tuesday suggests some think he is right.
So which are the biggest potential deals in which inversion plays a part, and might they be scuppered by the new rules?
Pfizer cannot come back with a raised bid for AstraZeneca until November 26. Its previous $118-billion bid was rejected, and partly caused the furore which led to Lew's actions.
"Today's measures do little to negatively impact the economic benefit from the proposed Pfizer acquisition of AstraZeneca," Andrew Baum, pharmaceuticals analyst at Citi, wrote in a research note.
Pfizer could still reduce its tax rate from 28 percent to 22 percent post inversion, according to Baum's calculations.
Shire's management, possibly fortuitously, insisted on a $500-million break fee if the $55-billion deal, which would reduce AbbVie's average tax from 22 percent to 13 percent by 2016, does not complete for political reasons. This demonstrates the shadows cast over inversion deals months ago.
However, it is still unclear whether the new rules will affect deals which have been agreed but not yet completed.
Medical devices specialist Medtronic announced in June a $42.9 billion cash-and-share deal to buy Covidien, a smaller rival which was founded in the U.S. but moved to Dublin for tax purposes. It has already run into trouble with some shareholders, who may have to pay extra capital gains tax on their shares, over the inversion element of the deal - particularly as some Medtronic executives and board members have received extra payments to make up for these effects.
Generic drugs specialist Mylan plans to cut its tax bill by buying Abbott Laboratories' branded specialty and generics business in developed markets outside the U.S in a $5.3 billion deal, and headquartering itself in the Netherlands. The deal is scheduled to close early next year, so could still be impacted by the new measures.