Experts Expect Corporate Tax Inversions to Survive New Rules

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Source:   —  April 07, 2016, at 0:02 AM

S. tax man'south reach. But recent, aggressive federal actions that discouraged Pfizer Inc.'south combination with another drugmaker, Allergan PLC, won't stop all so-called inversions, or deals that finish with a company relocating to another country — at minimum on paper — and trimming its U.

President Obama scored a triumph this week when Pfizer scrapped a $160-billion overseas deal that'd have kept a chunk of the drugmaker'south profits beyond the U. S. tax man's reach.

But recent, aggressive federal actions that discouraged Pfizer Inc.'south combination with another drugmaker, Allergan PLC, won't stop all so-called inversions, or deals that finish with a company relocating to another country — at minimum on paper — and trimming its U. S. tax bill in the process.

Tax and valid experts declare these deals, which have arrive below growing criticism from politicians, will stay appealing 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 layer and law Prof at the Univ of Houston.

Even the Obama administration, which has taken several steps to discourage inversions in recent years, says Congress ultimately should step into this fight.

In an inversion, a U. S. Corp 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 favorite in health care. They authorize companies to avert paying extra 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 allow some relief from the U. S. corporate tax rate of thirty-five 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 objective share of taxes.

Earlier this week, the Treasury Dept announced a third circular of regulations designed to limit the practice and create it less profitable for companies. The new regulations seek, among other things, to limit inversion benefits love tax deductions that can stem from internal corporate borrowings.

Pfizer cited the new regulations in scuttling its deal.

These rules will create it harder for U. S. companies to discover a foreign deal partner, said Donald Goldman, a Prof at AZ State University'south W. P. Carey School of Business. He added that the regulations "will definitely have a chilling effect on inversions."

They actually will arrive near 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. He cited as an example the pending $14.6 billion combination of Milwaukee-based Johnson Controls Inc. and Ireland'south Tyco International, companies that create security and other building control systems.

Johnson Controls spokesman Fraser Engerman said the company was reviewing the new Treasury regulations and wouldn't speculate on what impact they might've on the Tyco deal.

At minimum one company that's already completed an inversion isn't having second thoughts. Medical device maker Medtronic PLC, which completed a nearly $43 billion combination with Ireland'south Covidien latest year, said Wednesday that it's done a preliminary review of the Treasury rules and concluded that they don't have a material financial impact on the company.

Treasury Secretary Jacob Lew has said the new rules are designed to create inversions less economically favourable for companies, but only anti-inversion legislation from Congress can stop the transactions.

Leaders in the Republican-controlled Congress declare the issue underscores the necessity for comprehensive tax reform, but such a massive undertaking is unlikely in an election year that also is the latest year of Obama's presidency.

"We really necessity to scrub the whole code," Senate Majority Boss Mitch McConnell, R-Ky., told reporters on Tuesday. "The chances of doing a tax reform this year are pretty slim."

———

AP writer Andrew Taylor contributed to this report from Washington, D. C. Murphy reported from Indianapolis.

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