Takeaway: Big inversions could pressure lawmakers to take up tax overhaul sooner.
Corporations will continue to work around Treasury Department guidance restricting inversions if Congress doesn't overhaul corporate tax law, a National Foreign Trade Council executive said.
“Treasury rules are going to make it very restrictive of what you can do,” Catherine Schultz, vice president for tax policy at the NFTC, told reporters Jan. 7. “There are a lot of very good tax lawyers out there who are going to look at what Treasury is going to put out and see where the lines are being drawn and how they are going to change it.”
Treasury and Internal Revenue Service officials have said the government plans to release in the coming months more than 150 pages of regulations addressing deals where U.S. companies move their addresses outside the U.S. to reduce taxes. The rules will combine the provisions outlined in Notice 2014-52 and Notice 2015-79, released in recent years to stem the tide of corporations opting to reduce tax bills by inverting (244 DTR G-8, 12/21/15).
Government officials have said they can't entirely stop the deals without a law change from Congress. Schultz said a inversion fix can't happen without a broader look at U.S. corporate tax rates and policies.
The inversion discussion became increasingly heated in November when Pfizer Inc. and Ireland-based Allergan Plc agreed to merge in a $160 billion deal, making it the biggest inversion in U.S. history. The deal was structured in a way to skirt Treasury rules. Pfizer shareholders will end up holding about 56 percent of the combined company, just under the 60 percent threshold that triggers the inversion penalties (226 DTR G-4, 11/24/15).
Schultz doesn't predict there will be an slew of companies seeking to invert prior to action by Treasury or Congress, but said a shift in market conditions could change that. Inversions have been particularly attractive to pharmaceutical companies seeking the tax benefits in addition to being a way to gain patents and market share amid sluggish growth.
More big inversions could nudge “Congress into trying to do something sooner rather than later on tax reform,” Schultz said, noting there is little expectation for major tax changes prior to the presidential election next year. “That is something out there that has members of both parties upset.”