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The Cable

Look Out For ‘Unintended Consequences’ From Obama’s New Merger Rules

Wall Street has a history of outsmarting fed rules like the one keeping U.S. companies from moving overseas.


President Barack Obama has scored a major victory in his quest to stop American companies from avoiding taxes by moving overseas. But his Treasury Department’s new regulations, which sunk a $152 billion merger between U.S. drugmaker Pfizer Inc. and Ireland-based Allergan, may soon be outmaneuvered by corporations that probably are already looking for loopholes.

That’s according to Adam Rosenzweig, a professor of law at Washington University in St. Louis and an expert on tax law and policy. “The experience has been that each rule adopted by IRS or Treasury is effective in stopping the intended deal, but can lead to unintended consequences,” he told Foreign Policy.

Rosenzweig said it’s too early to tell what these consequences might be. In the past, he said, corporations simply changed merger tactics. When Congress placed limits on mergers in the past — for instance, if shareholders of a foreign acquirer own less than 20 percent of the merged company, the inversion fails. After Congress made this rule, Rosenzweig said, there were a number of mergers “just over the 20 percent line.” The same happened when Treasury upped this to 40 percent: “There was a move to mergers over the 40 percent line,” he said.

Under guidelines issued this week, Treasury has made it harder for companies to move their tax addresses out of the United States, and then move profits to low-tax countries. This process is known as earnings stripping.

The rule is only temporary; Congress needs to pass legislation making them permanent — meaning Wall Street has time to lobby against them.

“We do not believe we have the authority to address this inversion question through administrative action,” Treasury Secretary Jack Lew said in 2014. “If we did, we would be doing more. That’s why legislation is needed.” 

Pfizer, or another U.S. company that wants to merge with an overseas firm, could also challenge the rule in court. According to a report in the Wall Street Journal, getting a court to overturn it would be an uphill fight.

Companies could also simply change their tactics, as they have when faced with new financial regulations. For instance, after the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law in 2010, Barclays PLC changed the legal classification of the U.K. bank’s main subsidiary in the United States to avoid federal bank-capital requirements.

Photo credit: ALEX WONG/Getty Images

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