White House asks Congress to Stop Tax Inversion Deals

Originally posted on Pharmalot

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All those drug makers and investment banks chasing tax inversions now face opposition from the Obama administration. Yesterday, U.S. Treasury Secretary Jacob Lew wrote the House Ways & Means Committee, which composes tax law, to urge immediate legislation that would “shut down this abuse of our tax system.” And he suggests making any law retroactive to May 2014.

Whether Congress will heed this suggestion remains uncertain, but tax inversions, which have become something of a rage in the pharmaceutical industry, clearly remain highly contentious. These deals allow a company to enjoy a lower corporate tax rate by purchasing a rival that is based in certain foreign countries, and then shift headquarters there.

As this story notes, more tax inversions seem to have appeared recently, since Congress failed to pass a comprehensive tax code that would address concerns U.S. corporate tax rates are not competitive enough. Still, some companies are scrambling to get deals done and adding details that allow them to walk away without a penalty if the window closes and the tax advantage disappears.

The maneuver is not new. In fact, there were two deals involving drug makers last year – Actavis bought Warner-Chilcott and Perrigo purchased Elan – that spotlighted the issue. But inversions gained tremendous attention earlier this year when Pfizer PFE +1.78%attempted to acquire AstraZeneca AZN.LN -0.89%, which is based in the U.K., and the lower tax rate was a prominent feature of policy debate on both sides of the pond.

Since then, one of the largest device makers, Medtronic, agreed to purchase Covidien, which his based in Ireland. Meanwhile, AbbVie has offered to buy Shire, which is also based in Ireland. Mylan Laboratories has agreed to purchase an Abbott Laboratories drug business that is based in Europe and plans to shift headquarters there. And Walgreenmay also shift headquarters out of the U.S. as part of a plan to buy the rest of Alliance Boots, a U.K. drug store chain based in Switzerland.

For the moment, the Lew letter may succeed in generating more political noise, but not much more, according to Capitol Hill watchers. The letter “attempts to raise the temperature further, but will have little effect,” writes Terry Haines, an analyst at ISI Group. “It changes no votes, and the [Obama] administration has little political capital that can be used to change the result.”

“…It continues to be very difficult for congressional Democrats to succeed on inversions legislation, which is why it has gotten no traction over the past three months.” And inversions announced between now and the 2014 mid-term elections will “have to contend” with the noise and risk, he adds, but legislation this year “remains very unlikely.”