The U.S. Treasury Dept. yesterday moved to stop so-called "inversion" deals like the pending $43 billion merger of Medtronic (NYSE:MDT) and Covidien (NYSE:COV), in which a U.S. company buys a foreign firm and shifts its incorporation overseas to gain tax-free access to foreign cash.
"These first, targeted steps make substantial progress in constraining the creative techniques used to avoid U.S. taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and when possible, stopping them altogether," Treasury Secretary Jacob Lew said in prepared remarks. "While comprehensive business tax reform that includes specific anti-inversion provisions is the best way to address the recent surge of inversions, we cannot wait to address this problem. Treasury will continue to review a broad range of authorities for further anti-inversion measures as part of our continued work to close loopholes that allow some taxpayers to avoid paying their fair share."
The new rules, which apply to all deals closed starting yesterday, eliminate "certain techniques inverted companies currently use to gain tax-free access to the deferred earnings of a foreign subsidiary, significantly diminishing the ability of inverted companies to escape U.S. taxation," according to a press release.
"It also makes it more difficult for U.S. entities to invert by strengthening the requirement that the former owners of the U.S. company own less than 80% of the new combined entity. For some companies considering mergers, today’s action will mean that inversions no longer make economic sense," according to the release. "These transactions erode the U.S. tax base, unfairly placing a larger burden on all other taxpayers, including small businesses and hardworking Americans."
The Treasury Dept. said it’s still looking for ways to stymie inversion, "including through additional regulatory guidance as well as by reviewing our tax treaties and other international commitments."
It’s unclear how the new inversion restrictions will affect the Medtronic-Covidien deal.
"We are studying Treasury’s actions. We will release our perspective on any potential impact on our pending acquisition of Covidien following our complete review," Medtronic spokesman Fernando Vivanco told MassDevice.com via email.
Peter Lucht, a spokesman for Covidien, told us via email that his company is also reviewing the move.
"The combination of Medtronic and Covidien has always been primarily driven by a strategic decision to become the world’s premier medical technology and services company," Lucht wrote.
The news pushed both companies’ stocks down this morning. MDT shares were down 3.5% in pre-market trading at $63.85 apiece around 8:35 a.m. Eastern, before opening at $63.49 and slumping 2.3% to $64.47 each by 9:45. COV shares were $90.40 apiece at 8:35, down 4.0%, before opening at $87.63 and slipping 2.4% to $88.19 per.