Tax inversion crackdown ‘unlikely to derail deals’
Threats coming from Washington towards a tax inversion crackdown is very unlikely to slow down the amount of deals that we have seen of recent. The US Treasury of recent has flexed its political muscles and put pressure on companies planning to acquire foreign organisations to escape the US’s high corporation tax rate.
With the threat of crackdowns being immediate, it has spooked many investors of British companies that are either going through a tax inversion take over or a well suited to a inversion take over, with share prices sharply falling.
However immediate action is very unlikely, according to analysts at Bernstein, who have been citing companies and Washington insiders.
“The rhetoric that is now coming from the Treasury is, in part, sabre-rattling on the part of the Obama administration to try and discourage any further inversions among corporations,” they said.
“However, if other companies continue to blatantly pursue tax inversions in disregard of the Administration’s message, our consultants suggest that some type of unilateral action from the Treasury will be more likely.”
Although many experts don’t see that the amount of acquisition deals going through will slow down as tax inversion is only one of the factors why the US companies are looking to buy.
Big merger deals such as the $43 billion deal in the medical device sector between US company Medtronic and Ireland’s Coviden, were mainly driven by the efforts to gain a bigger footing in the market and help save costs as well. Neither of which are dependant on tax inversions.
The US treasury could punish Medtronic for inverting however the punishments are unlikely to deter plans to move to Ireland following the deal being completed.
The politicians in the US have mulled over many different punishments for inversion companies, such as; excluding them from government contracts and forbidding them from shielding their profits by offsetting them against debt. However such actions wouldn’t affect a medical device company, who don’t rely on government contracts and also tend to have strong cash flows and low debt.
AbbVie’s £32bn takeover of Shire would also continue to have strategic rationale without a tax inversion, said the analysts, though it could nonetheless be thwarted by anti-inversion action.
“Will AbbVie seek to walk away if the regulations change? We believe that in this particular case, the devil is in the details.
“Simply ridding the foreign units from US taxes and freeing the cash to work may make the deal worthwhile even if interest is not deductible and more earnings are taxable in the US,” they said.
With complications surrounding inversion deals, it is likely to put off Pfizer from making a fresh approach to AstraZeneca after its previous “final” offer of £69 billion fell through in May. Many analysts believe the deal was on shaky ground even before news of the tax inversion law changes in the US, with AstraZeneca being reluctant to be bought by its US rival.
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