The news this week that the US Treasury has changed its rules on inversions has resulted in the Pfizer Allergan merger not going ahead.
The changes also tell us a few truths about the current international tax landscape. Firstly, the US Treasury already tightened up their anti-inversion rules twice over the last two years – those changes weren’t viewed as having sufficient teeth to curb the appetite for inversions, but the latest rule changes look like having a far greater impact; the Treasury has upped its game, apparently. Also, whereas the rules do not have retrospective effect per se – deals closed before this week can still benefit from an inversion – they do impose a three year lookback which could have an impact on other inversion deals which are in process but not yet closed; it will be interesting to see if the Tyco and the Johnson Controls deals go ahead or not. Thirdly, the appetite for inversions – the Pfizer deal was going to be a $150bn deal – tells us just how great the potential tax savings are by using jurisdictions such as Ireland. Finally, inversions need very specific conditions to make sense – the reason that Ireland has become a rich ground for inversions of late is due to the fact that very large international businesses worth merging with are succeeding here already.
Are the latest changes a cause for worry? Probably not – by anyone’s standards an inversion is a very aggressive and transparent tax avoidance measure and the Treasury closing down such techniques does not mean that normal tax planning is under threat. A far more real threat to international tax planning would be if the US used the carrot approach instead of the stick approach and reduced its 35% corporation tax rate to a more moderate rate. That said, businesses who have expanded into Ireland are quick to point out that attractive tax rates may have drawn them to Ireland initially, they stay for the talent and the trading environment that allows them to grow and be successful.
Mark Butler, Managing Partner - HLB Sheehan Quinn