AbbVie, the US pharmaceutical company, said on Tuesday it is reconsidering its $54bn takeover of UK drugmaker Shire, which is headquartered in Ireland, because of new Treasury rules on tax inversions.
AbbVie said that its board of directors would meet by next week to decide whether to continue with its original recommendation to purchase Shire. The deal, which was agreed in July, would allow AbbVie to relocate to the UK and lower its tax rate to 13% by 2016, from 22% this year.
The board of Shire highlighted a break fee of approximately $1.635bn would be payable by AbbVie to Shire.
The move is an about-face for AbbVie, whose CEO last month sent a memo to Shire employees saying that the deal would go on, according to the Wall Street Journal. Another AbbVie executive at the time told AbbVie employees that the deal would close in the fourth quarter.
“AbbVie’s board will consider, among other things, the impact of the US Department of Treasury’s proposed unilateral changes to the tax regulations announced on September 22, 2014, including the impact to the fundamental financial benefits of the transaction,” the statement said.
With the US Congress unable to agree on measures to prevent US companies bailing out of the US tax system by becoming Irish, British or Dutch, often as brass-plate operations, the Obama administration last month announced new rules to combat what are known as tax inversions.
The takeover of foreign companies for tax purposes began in the 1980s and in 2004 Congress required the inverted company to have more than 20% foreign ownership but it did not prove to be a disincentive -- the acquired foreign company was often effectively an American firm with a brass-plate headquarters address overseas.
The number have accelerated in recent years and the plans of Pfizer, the drugs giant, to become "British" via the acquisition of rival Astra Zeneca renewed attention to the tax dodge this year.
The Financial Times says that thirteen inversion deals have been announced since the start of 2013 - - including Burger King’s $11.4bn acquisition of the Canadian coffee shop chain Tim Hortons - - and are together worth $178bn, according to Dealogic.
The Treasury Department had expected a further thirty this year.
The tax changes took effect immediately and applied to all deals that hadn't closed by Monday which means the planned move by Medtronic, the medical devices firm, to become "Irish" have likely been scuppered.
It may also upend the merger of banana firm Chiquita Brands International and Ireland's Fyffes plc; Shire moved its headquarters to Dublin in 2009.
The new rules include a prohibition on loans that enable companies access foreign cash without paying US taxes, and impose new curbs on actions that companies can use to make such transactions qualify for favourable tax treatment - - for example, the changes ban the use of certain assets to inflate the size of the foreign merger partner. They also prohibit US companies from paying special dividends just before an inversion in order to reduce their own size, or spinning off part of their operations to shareholders for the same reason.
“We’ve recently seen a few large corporations announce plans to exploit this loophole, undercutting businesses that act responsibly and leaving the middle class to pay the bill,” President Obama said in a statement. “I’m glad that Secretary Lew is exploring additional actions to help reverse this trend.”
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