A move by the US Treasury to close loopholes that encourage US companies to merge with foreign firms and relocate their tax residences offshore could stifle takeovers announced this year worth hundreds of billions of dollars. In particular, it will probably throw into doubt the agreed £32bn takeover of UK listed Shire by AbbVie of the US and it is less likely that Pfizer will revive its interest in AstraZenica.
The Treasury said it was moving after Congress failed to act on the issue.
The measures aim to counter schemes that allow a company, after an inversion, to avoid US taxes on earnings accumulated and held by the US partner offshore. Currently many US companies retain substantial foreign earnings offshore to avoid taxes they would have to pay upon repatriating them into the United States.
The “Inversion” process allows the US company to re-domicile itself to the home of the other partner in the deal, ostensibly allowing the new "foreign" firm to take control of those earnings and use them, even in the United States, without paying taxes on them.
The new rules aim to block this process. The new foreign parent of the company will be deemed as owning shares in the former US parent, making it liable for taxes on the old offshore earnings.