The Obama administration may score its first major victory in its solo battle against a rising trend of corporate inversions, if the Chicago-based AbbVie follows through and abandons plans to take over drug-maker Shire.
AbbVie, the research-based pharmaceutical company, said late Tuesday it was reconsidering an original plan to buy Shire, which makes drugs to combat attention deficit hyperactivity disorder (ADHD).
AbbVie had offered to buy Shire for about $US55 billion and proposed moving the merged company’s base of operations to London, in a move that would allow it to pay fewer taxes under a scheme known as an inversion. The deal could have been the largest inversion in US history.
But late last month, the Treasury Department announced executive moves to attempt to curb inversions. The Obama administration said it was acting unilaterally because it could no longer wait for Congress to address the growing trend legislatively.
In an SEC filing Tuesday night, AbbVie specifically cited the Treasury’s actions as a reason for reconsideration of the merger.
“AbbVie’s Board will consider, among other things, the impact of the US Department of Treasury’s proposed unilateral changes to the tax regulations announced on Sept. 22, 2014, including the impact to the fundamental financial benefits of the transaction,” the company said in the filing.
The Treasury Department is trying to limit inversions through two main strategies, administration officials said last month. It wants to make inversions less economically attractive and financially rewarding, something at which AbbVie hinted in its statement. It also wants to make it more difficult for the transactions to occur in the first place.
“This action will significantly diminish the ability of inverted companies to escape US taxation,” Treasury Secretary Jack Lew told reporters on a conference call last month. “For some companies considering deals, today’s action will mean that inversions no longer make economic sense.”
AbbVie said its board of directors will meet next week to consider whether to withdraw or modify its recommendation that the company’s stockholders vote to adopt the merger.
The financial benefits of the deal that AbbVie was reconsidering weren’t specifically detailed. But the Obama administration moved to make inversions less financially appealing through two main ways last month:
• Preventing inverted companies from restructuring a foreign subsidiary to access the subsidiary’s earnings tax-free. This action, under Section 7701 of the tax code, will treat a new foreign parent company as owning stock in the former US parent, rather than the controlled foreign corporation (CFC). It would limit the benefits of the so-called de-controlling strategy, by which a new foreign parent could access the deferred earnings of the CFC without ever paying taxes on them.
• Preventing “hopscotch” loans. The administration has moved to reduce the benefits of these loans, by which companies avoid taxes on profits of their CFCs by having the CFC make a loan to the new foreign parent, instead of the US parent.
Britain was an attractive option as a potential tax base for AbbVie because the UK government recently introduced new tax breaks for research-and-development companies.
The Obama administration has said halting inversions is necessary to prevent an erosion of the US corporate tax base. But Republicans and Democrats disagree about how to legislatively fix the problem, with Democrats preferring a standalone solution immediately and Republicans preferring to wait to include a fix in a broad reform of the nation’s tax code.
The Treasury Department spokesperson declined to comment. But senators who have taken up inversions as a pet issue painted the new development as the first major victory for the Obama administration’s new rules.
“I’m encouraged by reports that AbbVie will reconsider its decision to move its tax address out of the United States,” said Sen. Dick Durbin (D-Illinois), the second-ranking Democratic senator. “When corporations choose to invert and don’t pay their fair share of taxes, they leave the rest of us to pick up the tab. That isn’t right, and I hope that more companies will see the light.”
“The Obama Administration has taken action to help curb this practice,” he added.
This post has been updated.
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