The US Treasury Department's latest anti-inversion rules answer critics in a big way. The government has come under fire for not doing enough to stop tax-reducing M&A deals. The $160-billion Pfizer-Allergan merger is often held up as a prime example. Monday's new proposals seem to put it squarely in regulators' sights. With the target's shares down sharply, the Big Pharma tie-up looks under threat.
The Treasury Department made its first attempt at curbing inversions in 2014 after Burger King announced a deal with Tim Hortons that would put the new headquarters in Canada. The ensuing pressure prompted Shire and AbbVie to end their proposed $55 billion marriage. But dealmakers have managed to get around the rules; 20 other inversions have been announced since then, according to Thomson Reuters data.
Presidential candidates have used the Pfizer-Allergan transaction to criticise Treasury. Hillary Clinton called the deal an "egregious example" of companies trying to "evade the tax system". Republican Donald Trump has mentioned inversion deals as evidence that America isn't, in his eyes, winning.
Treasury's latest proposed roadblocks, though, include a three-year limit on foreign companies bulking up on US assets to skirt ownership rules for a future inversion. That seems directly targeted at Allergan, which has struck several deals in recent years that made it big enough to link up with Pfizer in a tax-saving transaction.
Shareholders are now betting the new rules could hurt the merger: Allergan's stock fell by more than a fifth in after-hours trading on Monday on the back of Treasury's announcement.
The department's other proposal limiting earnings stripping would restrict companies' ability to earn tax deductions for inter-company debt issued after an inversion deal. It's an issue that should have long since been addressed.
Ultimately, only Congress has the power to stop all types of tax-limiting transactions. For all its complaints of having limited authority to block the inversion herd, though, Treasury may finally have hit an elephant.
