Earlier this April, Pfizer was forced to walk away from what would've been one of the biggest pharmaceutical mergers in history with Allergan. Having originally settled on a $152 billion inversion deal, the two drug giants suddenly found their agreement dismantled by new Treasury regulations regarding the tax code. Various financial experts believe that the proposed revisions in this tightening of regulations specifically attacked the Pfizer & Allergan merger, although numerous transactions are likely to be effected as well - the new rules are expansive. Analysts and legal counselors for Pfizer and Allergan have spent days locked up in their conference rooms in the hopes of salvaging the original merger, but after extensive consideration, they have been forced to conclude that fighting the United States treasury would both be too expensive and likely to end in failure.
A corporate inversion, simply put, is when one company purchases certain competitor businesses in foreign countries with a lower tax burden, and then reincorporates there, often via a merger. This allows them to escape the relatively high tax rates of the United States. Recently, the Obama administration has been trying to put an end to these inversions. President Obama himself said at the start of the month that the Treasury's tightening of regulations with regards to corporate inversions would help to close "one of the most insidious tax loopholes out there."
Consequences of the Treasury's new rules are not limited to foiling the Pfizer-Allergan; six other inversion deals that are still pending are now likely to come to a halt as well. The new measures also address a technique commonly used by multinational companies, known as "earnings stripping." With this method, the American subsidiary of a multinational entity can take out loans from the foreign parent company, which gives the U.S. business interest payments that they're able to deduct from their earnings. Since this loan takes place within the company, the cost isn't reflected on financial tax statements. However, with the Treasury's new regulations, the subsidiary's debt would be treated as stock, thereby removing the interest payments altogether, and the company would ultimately pay taxes based on the total sum of their U.S. earnings.
It's clear to see that the Obama administration's new tax rules will have expansive and long-lasting corporate effects. Numerous financial analysts have voiced their skepticism over whether or not the Treasury has the authority to impose and enforce these new measures, but any effort to challenge their legality would take years, and the probability of success is low.