With Big Deals Quiet, Treasury Waits on Next Anti-Inversion Rule

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Sept. 21 — The Treasury Department last September issued a stern warning to companies examining inversion deals: Tough rules are coming.

A year later, the companies and their tax lawyers are still waiting. The government hasn't released its first detailed rules. And a potential second set targeting maneuvers that push profits out of the U.S. isn't expected any time soon.
The political heat around corporate inversions—deals where U.S. companies take foreign addresses and cut their tax rates—has faded since last year. Then, President Barack Obama questioned companies' “economic patriotism” and turned an arcane corner of the tax code into a populist cause.

Even without the rules, Treasury's crackdown has yielded some apparent success, stopping Abbvie Inc. from completing what would have been the largest inversion. And the inversions announced since the government's notice on Sept. 22, 2014, have been smaller than the deals involving name-brand companies that attracted attention from lawmakers and the public last year.

“Am I seeing a chilling effect? Sure,” said David Shapiro, an international tax lawyer at Saul Ewing LLP in Philadelphia. “If you have any doubts about whether you're clear under the notice, you're staying far away.”

That's partly because the government provided some details in its notice last year and said its rules—whenever they are released—will be retroactive to the date of the notice. That announcement outlined the potential changes, but the fine print that tax lawyers depend on hasn't been filled in.

‘Simply Stymied.’

“I think the Treasury is simply stymied,” said Steve Rosenthal, a senior fellow at the Tax Policy Center in Washington. “For the government, putting guidance or action on hold is always the easiest thing. Trying to get anything out of the government is a challenge.”

The lack of regulations could also be a strategic move by the government, intended to keep dealmakers on edge.
The Treasury Department said in an e-mailed statement that it is continuing to review its options.

“When Congress failed to act, Treasury used its existing authority to take targeted steps last fall to reduce the benefits of these transactions,” Treasury said. “This action had an important effect, but only Congress can close this loophole entirely.”

The response to Treasury Secretary Jacob J. Lew's call for Congress to act against inversions is going even more slowly. Legislation to slow inversions won't advance in the Republican-led Congress outside of a much larger tax plan.

The administration and top Republicans, including House Ways and Means Committee Chairman Paul D. Ryan (R-Wis.), have been discussing a broader revamp of international tax rules that would limit the advantages to companies of moving their addresses overseas.

That's moving slowly, too, and it's in danger of getting pushed to 2017 as the presidential race takes precedence over hashing out the kind of bipartisan tax deal that has eluded Congress for years.

Treasury acted in 2014 after a wave of large U.S. companies completed or attempted inversions, typically through transactions in which they acquired a smaller foreign company and then took an overseas address.

The Obama administration struggled to figure out what to do. It tried to get Congress to budge, but nothing happened. Eventually, the government settled on a collection of rules, which it outlined in last September's notice.

Financing Inversions

The notice said the government would make it harder for U.S. companies to borrow against their foreign cash to finance inversions. It also tightened the calculations for when a deal triggers anti-inversion restrictions in the tax code and changed how passive assets would be counted in those tallies.

It limited maneuvers by companies to shrink themselves by paying extraordinary dividends before a deal so they would escape the arithmetic tests in the anti-inversion law.

After Sept. 22, 2014, as Treasury started working on the rules, lawyers and some business groups asked for clarity. Insurers, in particular, warned that the rules on passive assets could make ordinary cross-border mergers more difficult.

Some inversions have moved forward in the past year. CF Industries Holdings Inc. plans to get a legal address in the U.K. after a deal with OCI NV. Terex Corp., which makes cranes and construction equipment, will end up with an address in Finland.

Less-publicized deals involving closely held companies have also been affected, triggering anti-inversion provisions and forcing the deals to be reworked, Shapiro said.

“It's a signal for people who are looking to invert,” he said. “But it's still also a big trap for the unwary.”

Earnings Stripping

Still, Treasury hasn't taken clear steps against the practice known as earnings-stripping, in which companies load up their U.S. subsidiaries with deductions and shift income to low- tax countries.

One thing lacking over the past year was a deal from a name-brand, iconic American company whose potential defection can stoke outrage from members of Congress, labor unions or the public.

In 2014, well-known U.S. companies such as Walgreen Co. and Pfizer Inc. explored inversions and Burger King completed its merger with Tim Hortons Inc. and moved to Canada. This year, Monsanto Co. explored an inversion and then abandoned it for reasons unrelated to taxes.

Since then, what's become more attractive—and worrisome to lawmakers—are deals in which larger foreign companies buy U.S.-based companies, shrinking the U.S. tax base.

Altice, Salix

A recent example is the purchase by Altice NV, based in the Netherlands, of Cablevision Systems Corp. Salix Pharmaceuticals Ltd. canceled a planned inversion after the Treasury notice came out. Less than six months later, it was sold to Valeant Pharmaceuticals International Inc., which is run from New Jersey and incorporated in Canada.

“There was some market reaction to what Treasury put forward, but deals are still taking place,” said Nancy McLernon, chief executive officer of the Organization for International Investment, a Washington trade group that represents the U.S. operations of companies based elsewhere. “And the only way to truly have an impact is through comprehensive reform.”

Those deals, however, don't necessarily suggest a massive rush to the exits that warrants additional immediate action, Rosenthal said. Companies, he said, have also gotten smarter and try to avoid bragging about their tax savings.

“If Treasury thought that the U.S. corporate tax base was eroding quickly, I think they would take some actions quickly,” Rosenthal said. “They don't feel the imperative to move as they had last September.”

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net
To contact the editor responsible for this story: Jodi Schneider at jschneider50@bloomberg.net

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