The big story in tax inversion land is that despite their full-speed-ahead plans of a few weeks ago, the American big-pharma firm AbbVie might not acquire the Irish drug maker Shire. According to the NYT:
If the merger were to fall apart, it would be the biggest casualty of new tax rules aimed at inversion deals.
A few reflections:
–After Treasury announced their new rules, there was a fair bit of predictable chest-thumping by seasoned tax avoiders who argued that the new rules would be easily gotten-around. And perhaps they will be—a lot of those folks are good at what they do.
But there’s no question that Treasury created a non-trivial speed bump. And they did so precisely in the area of “hopscotching.”
–That’s where you move deferred earnings (foreign profits of US multinationals held abroad to avoid US taxation) around through the newly inverted company in such a way as to get them back here in the US tax free. And it looks to me like AbbVie was highly motivated by precisely this possibility. According to the FT, at least half of their $10 billion in cash is held outside the US, and their foreign operations have shaved between 10 and 20 percentage points off of their effective US tax rates in recent years.
–So, let’s just try to keep it real. These companies are inverting to lower their US tax bills and the new Treasury rules make that at least marginally harder. I’d argue that’s a good thing because it looks to me like the companies are not restructuring or relocating their businesses (or at least their tax mailboxes) in ways that boost economic efficiency; they’re doing so to avoid taxes.
That’s not crazy or illegal—evasion, illegal; avoidance, legal—but Treasury has not just a right but a responsibility to try to shut these loopholes down. Of course, they have not done so here, as they themselves consistently say. It would take legislation to accomplish that.
But we all know that in this and probably in the next Congress, such legislation is not forthcoming, so I expect to see more in this area by way of rule changes that do not require Congressional approval. Meanwhile, the Treasury has clearly altered the financial incentives and shares in the new company are almost certainly worth less than they were before the Treasury acted, so the merger rethinks are not a big surprise.
Of course, the AbbVie deal may still go through—they’re required to pay Shire a $1.6 billion breakup fee (if only I’d thought of that back in high-school!) if they call off the deal—but the fact of their second thoughts suggests the Treasury’s rules are having their intended effect.
Update: This NYT piece just out seems consistent with the above.