Following the U.S. Department of Treasury’s recent announcement to reduce the tax benefits of corporate inversions, the Chicago-based pharmaceutical company AbbVie has advised its shareholders to reject the proposed acquisition of Dublin-based drug maker Shire. AbbVie’s proposed $54 billion acquisition would have been the largest inversion deal in U.S. history.
In a corporate inversion, a U.S. company acquires or merges with a foreign one to change its legal residence to the foreign country while maintaining operations in the U.S. This inverted “foreign” company is no longer obligated to pay U.S. taxes on profits earned overseas. Inversions have increased in recent years—there have been forty-seven inversions in the past decade compared to twenty-nine inversions in the two prior decades.
The new Treasury Department rules do not prohibit inversions, but instead take measures to limit their profitability. For instance, the new rules aim to curtail the use of so-called “hopscotch loans” in which the inverted parent company borrows money from its foreign subsidiary without paying U.S. taxes. The new rules will now treat such loans as “U.S. property” and they will be taxed as dividends. As Treasury Secretary Jack Lew further explained, “[t]his action will significantly diminish the ability of inverted companies to escape US taxation. For some companies considering deals, today’s action will mean that inversions no longer make economic sense.”
These changes likely spurred AbbVie to call off the deal because AbbVie was expected to use such loans to finance the inversion. In a statement explaining the decision, AbbVie CEO Richard Gonzales said, “[a]lthough the strategic rationale of combining our two companies remains strong, the agreed-upon valuation is no longer supported as a result of the changes to the tax rules, and we did not believe it was in the best interests of our stockholders to proceed.” AbbVie will likely have to pay $1.6 billion to Shire for cancelling the deal.
New Treasury Rules Prompt AbbVie to Abandon Inversion Plans (PDF)