US Treasury To Mr. Ian C. Read: “Say Hello — To The End Of Your Welfare Checks”

Well, I hate to say I told you so — but I did — right before Thanksgiving 2015. Most observers thought there was nothing Mr. Obama could do to blunt Mr. Read’s latest “technically not an inversion” US tax rate dodge, with his $166 billion mega-sized “Pfilergan” deal. [Much background here, if you search “Pfizer” above — we’ve been covering it for three years solid. In a later post, I will explain why all this whining about purported “bills of attainder“, and “ex post facto” laws — is entirely specious. Sheesh — there is no “vested property right” — to avoid lawful taxation, in the US. More on that, another day.]

Knowing that the Congress has granted the US Treasury Department particularly broad authority to interpret, calculate, and collect taxes on business — I went out on a limb and said that the tax benefits to Pfizer of the proposed Allergan deal would be “scuttled“.

About four hours before Villanova thrilled the nation last night (dribble — pass — Jenkins 35-foot-swish, for the win!), Treasury Secretary Lew, acting on authority from our 44th President, issued emergency rules that effectively delay for three years Pfizer’s ability to garner the earnings-stripping tax rate reduction leverage Mr. Read seeks — with his Pfilergan deal.

In essence, the new rules disallow the counting of roll-up share values — from less than three year old mergers, when calculating whether a US entity may invoke the re-domicle tax rate reductions Mr. Read seeks. That is, the roll-ups (like those both Allergan and Valeant accomplished) will need to be more than three years old and cold, before the share counts are includable in the US Treasury “not more than 60 per cent” test (designed to curb inversions, and like deals) that were announced last year.

So, welcome to the end of your US corporate welfare checks, Mr. Read — now you must choose: Do your Pfilergan deal, with immensely reduced tax rate leverage values, or. . . fully share in paying for the benefits you reap, as a participant in the most vibrant economy on the planet — all supported by the architecture that makes America’s markets the envy of the world. Choose.

As irony would have it, only Allergan’s stock is falling — since the deal is likely off; Pfizer is rising, because there will be less per share dilution to its earnings, and a break-up may be back on the table. Here’s a bit, from the Treasury release of last night — told ‘ya:

. . . .Limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of U.S. companies. This will prevent a foreign company (including a recent inverter) that acquires multiple American companies in stock-based transactions from using the resulting increase in size to avoid the current inversion thresholds for a subsequent U.S. acquisition.

– Address earnings stripping by:

+ Targeting transactions that generate large interest deductions by simply increasing related-party debt without financing new investment in the United States.

+ Allowing the IRS on audit to divide debt instruments into part debt and part equity, rather than the current system that generally treats them as wholly one or the other.

+ Facilitating improved due diligence and compliance by requiring certain large corporations to do up-front due diligence and documentation with respect to the characterization of related-party financial instruments as debt. If these requirements are not met, instruments will be treated as equity for tax purposes.

– Formalize Treasury’s two previous actions in September 2014 and November 2015.

Treasury will continue to explore additional ways to address inversions. . . .

Updated graphic coming shortly — and. . . way to go, lil’ ‘Nova! huge grins here — even if Mr. Obama and I had our brackets destroyed by your improbable — but thrilling — run!

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