Tax Inversion: What is it? And What Will President Obama’s New Rules Mean For Multinationals?

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‘A hart hotly pursued by the hounds fled for refuge into an ox-stall, and buried itself in a truss of hay, leaving nothing to be seen but the tips of his horns. Soon after the hunters came up and asked if anyone had seen the hart. The stable boys, who had been resting after their dinner, looked round, but could see nothing, and the hunters went away. Shortly afterwards the master came in, and looking round, saw that something unusual had taken place. He pointed to the truss of hay and said: “What are those two curious things sticking out of the hay?” And when the stable boys came to look they discovered the hart, and soon made an end of him.’

Like Aesop’s fabled hart, American companies have long been in the habit of trying to disguise themselves to hide their true appearance only they replace the truss of hay with the haven of tax inversion.

What is Tax Inversion?

Quite simply, tax inversion is the use of a loophole within US tax law that has allowed companies in the past to move their headquarters to jurisdictions with lower corporate tax rates. For example, in 1982 McDermott Inc, a New Orleans-based construction company, flipped its corporate structure so that the Panamanian-based McDermott International became the parent company thus making it subject to tax rates in Panama and not the US.

More recently, in 2014 Actavis agreed in principal to buy Allergan for $70.5bn and subsequently allowed itself to be enveloped by Allergan in order to move its headquarters to Ireland.

Tax inversion deals in the past have garnered some criticism, but it was clear that only the stable boys and huntsmen had been paying attention. However, in the past few years, there has been a considerable groundswell of political pressure against the practice.

President Obama has called tax inversion ‘immoral’ and a ‘huge problem’, and it seems to be the only issue that unites Presidential candidates ranging from Donald Trump to Bernie Sanders. Furthermore, Treasury guidelines released in 2014 and 2015 have been responsible for the pressure that has thwarted proposed inversion deals such as Abbvie’s planned takeover of Irish-based Shire.

President Obama’s New Rules

Last Tuesday’s announcement from The Treasury marked a significant step-up in the battle against corporate tax inversion. The rules released, aim to do two things. Firstly, it makes it harder for companies to move their jurisdiction outside of the US for tax reasons, secondly, it attempts to eradicate earnings stripping – the single most important benefit of why companies want to invert in the first place.

Most commentators believe that the new rules were squarely aimed at the proposed Pfizer-Allergan deal. If so they had their desired effect, with Pfizer announcing that the deal with Allergan had been called off last Wednesday leading to a 19% slump in Allergan’s stock.

How Will The New Tax Inversion Laws Affect Big Business 

Companies face a unique challenge when it comes to tax inversion deals. It is now the politicians, and not the company’s shareholders, that need convincing of an inversion deal’s suitability and appropriateness. Due to the political groundswell on the issue, companies can no longer openly communicate the inversion benefits that they hope to reap as AbbVie’s CEO Richard Gonzalez tirelessly did in his pursuit of Shire. Rather a strong and focused communication strategy is needed, which promotes the image of a long-term strategic business rationale behind any deal and completely disassociates the deal from any potential tax inversion benefits. I had thought that Pfizer had done such a job in communicating its desire to purchase Allergan, but clearly in light of Tuesday’s Treasury announcement more is needed.

Quite simply, it is no longer acceptable or effective for a company to allow the tips of its horns to poke through the truss of hay. Rather, in order to navigate what has become such a hot-button issue in the US, a company must ensure its horns are completely hidden otherwise the eyes of The Treasury are sure to recognize them for the hart that they are. is a financial blog written by a British expatriate Max Rayden, who moved to the US when he married his beautiful wife. “After completing my undergraduate studies in Classics at King’s College London, an MA in International Relations at the London School of Economics, a Graduate Diploma in Law at BPP Law School, and the Bar Training Course at The College of Law, I was Called to The Bar of England & Wales as a barrister. Upon completing my studies I worked in the financial sector.” – Max Rayden

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