AbbVie - Shire Deal Collapses, Calls For Corporate Tax Reform

Despite insisting a few months ago that his company’s upcoming merger with UK-based Shire was not for the tax impact, the CEO of U.S. pharmaceutical maker AbbVie blamed U.S. Treasury Department rules for its decision to shutter the deal.

AbbVie explained in a recent statement that its proposed merger with Shire had to been terminated as a result of new regulatory measures that were introduced by the Treasury Department to reduce the tax impact seen in corporate inversions, according to International Business Times. Inversions are the process by which U.S. multinationals acquire foreign competitors in order to merge with them. The new company is able to be located abroad, where it can enjoy a lower tax environment.

“The Company’s decision was based upon its assessment of the 22 September, 2014 notice issued by the US Department of Treasury, which re-interpreted longstanding tax principles in a uniquely selective manner designed specifically to destroy the financial benefits of these types of transactions,” an AbbVie spokesperson said in a statement, according to the news source. “The notice introduced an unacceptable level of risk and uncertainty given the magnitude of the proposed changes and the stated intention of the Department of Treasury to continue to revise tax principles to further impact such transactions.”

Quartz reported on the two key provisions included in the new regulations.

First, the regulations change how ownership is calculated in the inversion. Currently, the shareholders of the foreign company are required to own at least 20 percent of the new company. This is still the case, but the government now won’t allow “passive assets” like cash or securities, to be counted in the company’s value. It also won’t allow U.S. firms to pay large dividends to shareholders before an inversion in order to shrink their value.

Second, it is now more difficult for inverted companies to make use of the tax free money that they have accumulated overseas. A common practice among multinational companies is to keep money overseas so that it cannot be taxed by the U.S. government until it is repatriated. Foreign companies have no such difficulty. As per the new regulations, however, inverted multinationals will no longer be able to use this foreign money to make interest-free loans to their U.S. subsidiaries or move un-taxed cash stockpiles to the new foreign holding company.

“The unprecedented unilateral action by the US Department of Treasury may have destroyed the value in this transaction, but it does not resolve a critical issue facing American businesses today,” said AbbVie CEO Richard Gonzalez, according to IB Times. “The US tax code is outdated and is putting global US-based companies at a disadvantage to foreign competitors in an area of critical importance, specifically investing in the United States. Comprehensive tax reform is essential to create competitiveness and to stimulate investment in the economy.”