US lawmakers aim to block tax inversion deals

US companies could be blocked from reducing their corporate tax liabilities by merging with overseas companies - a process known as tax inversion - if President Obama has his way.

The White House is determined to put a brake on the practice, which has been a driver for a number of deals in the pharmaceutical sector, including Pfizer's aborted takeover attempt on AstraZeneca (AZ) as well as AbbVie's overtures to Shire, which have reached the negotiation stage.

Details of the plans emerged in a letter sent yesterday from Treasury Secretary Jacob Lew to leaders of the House of Representatives' Committee on Ways and Means and the Senate Finance Committee.

Lew writes that deals agreed by US multinationals to domicile in low-tax areas of the world - with minimal change in business operations - effectively 'hollow out' the US corporate income tax base.

AbbVie has suggested that it could reduce its corporate tax rate from 22 per cent to 13 per cent by acquiring Shire, while Mylan has also pointed to the tax benefits of a $5.3bn agreement to purchase Abbott Laboratories' overseas generic drugs businesses.

Meanwhile, outside pharma, tax inversions are also driving mergers and acquisitions (M&A) in "retail, consumer and manufacturing", according to Lew, who describes the practice as akin to companies "renouncing their citizenship". Some 50 US companies are estimated to have closed inversion deals in the last 10 years.

"The firms involved in these transactions still expect to benefit from their business location in the US, with our protection of intellectual property rights, our support of R&D, our investment climate and our infrastructure, all funded by various levels of government," he writes.

Seeking to close the inversion loophole, President Obama's budget for fiscal 2015 includes proposals to prevent companies from changing their tax domicile without a change in control of the company itself, and have already been backed by senior politicians including Senate Finance Committee chair Ron Wyden.

The Treasury wants to see sweeping tax reform, with a lowered corporate rate, a broader tax base and a simplified system overall.

"Congress should enact legislation immediately - and make it retroactive to May 2014 - to shut down this abuse of our tax system," insists Lew.

The Treasury position supports the view voiced by AZ chief executive Pascal Soriot in his defence against Pfizer's takeover earlier this year that the transaction was subject to significant "execution risk" because of the brewing controversy in the US over tax inversion deals.

Pfizer has since been forced to back away from pursuit of AZ in accordance with UK takeover rules, and the politicisation of inversion may make it reluctant to return with a bid once that moratorium period expires later in the year.

Links:

Shire enters takeover talks with AbbVie

Pfizer declares end to AstraZeneca bid ... for now