Pharma giant AbbVie Inc (NYSE:ABBV) announced on Tuesday, October 14th that they were reconsidering their merger with Shire PLC (ADR) (NASDAQ:SHPG) (LON:SHP) due to White House efforts to reduce the advantages firms derive from tax inversion deals. The AbbVie BoD is scheduled to meet on Oct. 20 to decide whether to move forward with the $54 billion deal, which would allow the merged firm to reincorporate in the UK to take advantage of a significantly lower corporate tax rate.
The mere fact that AbbVie Inc (NYSE:ABBV) is rethinking the deal suggests that the Obama administration’s campaign to clamp down on inversions is having some effect. This is particularly telling given that many people had criticized Obama by saying the recent tax law changes to discourage inversions did not go far enough.
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Corporate tax inversions
The key issue here is corporate tax inversions, a Wall Street deal tactic that has gained great currency over the last couple of years. Businesses that invert (move the company headquarters to a low tax country) argue that the money they save makes them competitive against global competitors who pay lower taxes. Critics and most of the general public, however, feel such transactions are unpatriotic.
Quintessentially American firms including Burger King have pursued moves abroad through mergers. Burger King Worldwide Inc (NYSE:BKW) announced six weeks ago that it would acquire the Canadian donut and fast food chain Tim Hortons Inc. (NYSE:THI) (TSE:THI) and move its headquarters to Canada.
New Treasury Department rules impact Abbvie – Shire deal
At the behest of the White House, the Treasury Department took a number of steps to make inversion deals less attractive in September, when it announced changes to corporate tax rules that would eliminate some of the advantages of inverting. The Obama administration does not have the power to stop inversions without Congressional approval, but they can tighten the regulations to make the benefits less significant.
Analysts had already noted that AbbVie Inc (NYSE:ABBV)-Shire PLC (ADR) (NASDAQ:SHPG) (LON:SHP) deal could be impacted the Treasury Department’s new rules, which would prevent “hopscotch loans” as a financing method. A hopscotch loan is when a foreign subsidiary of an inverted company lends money to the new foreign parent.
The treatment of such loans is changed in the new regulations, which now consider the loan funds as dividends, and therefore taxable by the I.R.S.
The U.S. medical device maker Medtronic, Inc. (NYSE:MDT) has already modified the financing for its $43 billion merger with Irish firm Covidien plc (NYSE:COV), cutting out the hopscotch loans, which were one of the major financial benefits of the deal.