U.S. Treasury Secretary Jack Lew is mad as hell, and he's not taking it anymore. The Treasury is implementing rules to limit so-called inversion deals, where U.S. companies merge with partners abroad in order to avoid paying taxes.
"This action will significantly diminish the ability of inverted companies to escape U.S. taxation," Lew said in a conference call yesterday. "For some companies considering deals, today's action will mean that inversions no longer make economic sense."
President Obama chimed in and took a swipe at Congress at the same time. "While there's no substitute for Congressional action, my Administration will act wherever we can to protect the progress the American people have worked so hard to bring about," Obama said in a statement.
Eight pending deals are in jeopardy because of the new rules, and companies that are involved in pending deals or considered targets like AbbVie (ABBV), AstraZeneca (AZN), and Medtronic (MDT) are trading lower today.
“There are five aspects to inversions and why they happen, and what Jack Lew announced addressed three of them, and it doesn’t address the big reason why people do them,” Josh Brown of Ritholtz Wealth Management says in the attached video. “So I don’t think it kills inversions, but I do think it cools off the street’s appetite for them.”
As noted here, the three areas where the Treasury’s actions will have impact are:
Preventing U.S. companies from "accessing a foreign subsidiary's earnings while deferring U.S. taxes through what it called 'hopscotch' loans."
Preventing inverted companies from "restructuring a foreign subsidiary in order to access the subsidiary's earnings tax-free."
Blocking inverted companies from "transferring cash or property from what's known as a 'controlled foreign corporation to the new parent company to completely avoid U.S. tax."
The big factor, which Brown calls the “the Google/Apple loophole” that Treasury failed to address is where companies classify “X% of their business as being foreign and it stays offshore and they don’t pay taxes to the U.S.” That money typically sits in foreign bank accounts as cash or cash equivalents.
While Brown isn’t in favor of companies like Google (GOOGL) and Apple (AAPL) having to pay exhorbitant tax bills to repatriate cash, he does find issue with companies trying to invert in order to avoid paying taxes.
“The shame of it is that all of the innovation and the brilliance that goes into that half of the process of building a drug, that’s where the value is, the manufacturing or whatever the case may be is overseas,” he says. “[The companies] are looking at way to, ‘how can we have the United States be as little a part of this as possible,’ and I think that’s what’s upsetting.”
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