Experts expect new rules to slow forming of corporate tax inversions
President Barack Obama scored a victory this week when Pfizer scrapped a $160 billion overseas deal that would have kept a chunk of the drugmaker’s profits beyond the U.S. tax man’s reach.
But recent, aggressive federal actions that discouraged Pfizer Inc.’s combination with another drugmaker, Allergan PLC, won’t stop all so-called inversions, or deals that end with a company relocating to another country — at least on paper — and trimming its U.S. tax bill in the process. Tax and legal experts say these deals, which have come under growing criticism from politicians, will remain attractive to some companies until the U.S. pursues a massive tax law overhaul.
“There may be a temporary respite from inversions, but the large financial benefits ... are still there,” said Bret Wells, a tax lawyer and law professor at the University of Houston.
Even the Obama administration, which has taken several steps to discourage inversions in recent years, says Congress ultimately must step into this fight. In an inversion, a U.S. corporation and a foreign company combine into a parent company based in the foreign country. For tax purposes, the U.S. company becomes foreign-owned, even if all the executives and operations stay in the U.S.
Inversions have become particularly popular in health care. They allow companies to avoid paying additional taxes that the U.S. government would impose on money earned overseas and then transferred back to the parent. They can reduce corporate tax liability in other ways, and they provide some relief from the U.S. corporate tax rate of 35 percent, which is the highest in the industrialized world.
But Obama and others have said these deals shortchange the country because corporations fail to pay their fair share of taxes.
Earlier this week, the Treasury Department announced a third round of regulations designed to limit the practice and make it less lucrative for companies. The new regulations seek, among other things, to limit inversion benefits like tax deductions that can stem from internal corporate borrowings.
Pfizer cited the new regulations in scuttling its deal.
These rules will make it harder for U.S. companies to find a foreign deal partner, said Donald Goldman, a professor at Arizona State University’s W.P. Carey School of Business. He added that the regulations “will definitely have a chilling effect on inversions.”
They actually will come close to killing the practice, according to Robert Willens, president of a New York-based tax and accounting service and a former Lehman Brothers managing director. But he said some narrowly tailored deals that have the right balance of U.S. and foreign ownership should survive.