In November of this year, the IRS outlined more new anti-inversion rules with potentially significant implications. 

In a year when a new pharma deals seemed to be around every corner, one deal stood out above all the others – Pfizer’s merger with Allergan, which at a value of £160 billion is the biggest in the history of the industry. Other notable deals included GSK swapping its oncology division for Novartis’ vaccines business, Teva buying Allergan’s generics division for £40.5 billion after fruitlessly chasing Mylan for months, and Pfizer acquriing Hospira for $17 billion.

Inverted priorities

From Mylan and Abbott Labs, the failed AbbVie/Shire deal to the potential Pfizer/Allergan and Baxalta/Shire transactions, many recent pharma deals have had one thing in common – they are structured as inversions. These transactions involve a combination of a US corporation and a foreign corporation where the publicly-traded company is organised outside the United States, resulting in significant tax benefits.

The US government, unsurprisingly, doesn’t like inversions. Under rules enacted in 2003, if the US corporation’s historical shareholder base exceeds certain ownership percentage thresholds in the Foreign TopCo, the structure’s tax benefits may be limited (60 percent) or eliminated (80 percent).

In November of this year, the IRS outlined more new anti-inversion rules with potentially significant implications. One rule would treat most inversions where the Foreign TopCo is organised in a different jurisdiction from the non-US target as inversions that cross the 80 percent inversion threshold. The other rule attempts to clarify that Foreign TopCo shares issued for assets (active or otherwise) may be disregarded if they are undertaken with the main purpose of avoiding the anti-inversion rules. An example suggests that certain inversion structures involving newly-formed Foreign TopCos could result in disregarding the stock issued to the historical non-US target shareholders.

As the IRS awaits Congressional action intended to end the inversion phenomenon, it will likely continue to propose new rules to further restrict a US multinational’s ability to invert. Therefore, companies contemplating cross-border business combinations involving a US multinational should take heed of these complex rules. 

Leon Ferera and Scott Levine, partners, Jones Day