The Treasury Department has announced a new package of rules aimed at making “tax inversions” — when U.S. companies move abroad for lower tax rates — less financially appealing.
The regulations announced Monday, the third round that Treasury has put forward on inversions, seek to limit internal corporate borrowing that shifts profits out of the United States.
Tax inversions have sparked a political outcry. In November, drug companies Pfizer and Allergan announced a $160-billion deal that could save New York-based Pfizer hundreds of millions of dollars in U.S. taxes annually by moving its headquarters for tax purposes to Ireland, where Allergan is based.
Late Monday, Pfizer and Allergan issued a joint statement saying that they are reviewing the new Treasury rules and would not speculate on their potential effects. Investors, however, appeared to think the rules could undermine the two companies’ deal. Allergan’s shares were down 16% early Tuesday. Pfizer’s shares were up slightly.
Treasury Secretary Jacob Lew said the new rules are designed to make inversions less economically beneficial for companies. But he again called on Congress to act to halt the practice.
“Only new anti-inversion legislation can stop these transactions,” Lew said on a conference call with reporters. “Until that time, creative accountants and lawyers will continue to seek new ways for companies to move their tax residences overseas and avoid paying taxes here at home.”
Several Democrats have announced bills to make it harder for U.S. corporations to invert, and President Obama has included proposals in a package of measures to reform corporate taxes. But prospects for passing such legislation in an election year are not deemed high, given the wide differences between Democrats and Republicans on taxes.
In a statement, Sen. Charles Schumer (D-N.Y.) praised the Treasury Department’s new set of proposals. But he said “the only way to slam the door on inversions for good is to pass tough, strong legislation and reform our tax laws.”
Lew said the new Treasury proposals would also take aim at foreign companies that acquire multiple U.S. firms over a short period of time. Lew said these transactions were being done by what he called “serial inverters” in an effort to keep slashing their U.S. tax liabilities.