Barack Obama stepped up the offensive on Tuesday championing new proposals to deter “inversion” deals — such as Pfizer-Allergan — that companies use to move to low-tax jurisdictions, accusing them of exploiting “one of the most insidious tax loopholes out there”.
Multinationals responded by saying they were being unfairly caught in the crossfire of Mr Obama’s campaign as their operations in the US could also be affected by the new rules.
The angry rhetoric came a day after the Treasury department released new proposals which threatened the biggest planned inversion to date — Pfizer’s takeover of Irish-domiciled Allergan— and triggered big losses for some hedge funds, such as Paulson & Co and Third Point.
“It came as a total surprise. Everyone thought the Treasury had used all their firepower,” said one hedge fund manager.
Politicians have been riled by a defining trend of the recent boom in M&A, which has seen dozens of US companies using inversions to escape the US’s high corporate tax rate and its insistence on taxing overseas earnings.
The Treasury’s latest moves would make inversions less lucrative by eliminating a tax benefit for “abusive” inverters. But its plan would also deny the benefit to foreign companies with US operations.
“Rather than using a scalpel to deal with this issue they are using a machete,” said Nancy McLernon, president of the Organisation for International Investment, a trade group for foreign companies in the US.
“It’s a misguided approach. They’re trying to go after those companies that are doing something they think is problematic and carelessly hitting a whole class of employers.”
The tax benefit stems from companies’ use of internal loans to cut their tax bills. By loading up US subsidiaries with debt from head office, foreign companies can deduct the interest payments from their US tax bills — a practice called earnings stripping.
But Ms McLernon said the proposal would penalise foreign companies with long histories in the US that use legitimate intra-company loans to pay for investments in facilities and equipment.
Alex Spitzer, a senior tax executive at Nestlé US, said: “It’s radical and would have a chilling effect on jobs and investment in the US. It would increase our cost of capital and therefore make our investments less palatable.”
Analysts warned that the rules looked likely to scupper the second biggest M&A deal of all time. “This regulation was designed to kill Pfizer-Allergan,” said one large fund manager.
Pfizer stood to escape US taxes on more than $128bn of profits stored abroad.
Shares in Allergan plunged 16.3 per cent in New York afternoon trading, spreading heavy losses across a number of hedge funds that gambled on the certainty of a deal closing.
Hedge funds Paulson & Co, Pentwater Capital and Third Point all held positions of more than 1 per cent in Allergan, according to Bloomberg data, meaning their paper losses on the day were more than $150m each.
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