Tax rules set off scramble in boardrooms

Corporate America is scrambling to figure out how the Obama administration’s new rules for offshore tax deals could affect their business plans — and their bottom lines.

Business leaders have to navigate a maze of highly technical new rules on the offshore tax deals known as inversions, on obscure maneuvers known as “hopscotch” loans and the “de-controlling” strategy. 

{mosads}With the Treasury Department warning that it’s laying the groundwork for even more administrative actions, some businesses might be wondering whether high-profile tax deals are even worth the trouble.

“If Treasury’s trying to confuse people, they’re doing a good job,” said Steven Rosenthal, a former corporate lawyer who’s now at the Urban-Brookings Tax Policy Center. “But you also have to remember: taxes are difficult, and these rules are very complicated.” 

The early response to the Treasury Department’s announcement, which came Monday after the close of trading, suggests that business is still grappling with how to respond. 

“There’s a reason why tax lobbyists are the highest paid lobbyists in town,” one K Street hand said. “Tax policy is just so complex.”

Treasury Secretary Jack Lew suggested Monday that throwing business for a loop was one of the White House’s goals with the new anti-inversion rules; some companies might think cross-border mergers no longer make sense. 

Democrats have been pounding the drum for months against inversions, a maneuver in which U.S. firms typically merge with smaller foreign companies and then move their headquarters abroad in order to avoid U.S. tax rates.

Some tax analysts said the new rules are more far-reaching than they anticipated, and the stock prices for companies involved in the most prominent inversions dipped in trading Tuesday.

Medtronic, the medical device maker that could see its access to offshore profits hampered by the new rules, saw its stock fall almost 3 percent on Tuesday. 

Shares of Covidien, the Irish company that Medtronic is purchasing, fell roughly 2.5 percent, and the pharmaceutical company AbbVie’s stock dropped around 2 percent. The Dow Jones industrial average fell 0.7 percent overall on Tuesday.

Credit rater Moody’s said Tuesday that the rules would likely reduce some of the economic benefits of pending inversion deals, but said it would wait before making any moves against credit ratings. 

Washington’s most prominent business advocates struck a defiant tone on the Treasury Department’s actions. Martin Regalia, of the Chamber of Commerce, said the new proposals were just the latest in a string of bad economic policy out of President Obama’s White House, and knocked “the administration’s vain attempt to lock corporations in to an obsolete tax system.” 

The Business Roundtable, a group of leading corporate chief executives, pounded the same theme, dubbing the rules “a Band-Aid solution that will only make matters worse.”

Canadian doughnut chain Tim Hortons, which is merging with Burger King in likely the most visible inversion to date, also stressed Tuesday that its deal would go forward as planned.

What’s less known is how much — if at all — the new rules will stem the tide of new mergers. The Treasury Department’s rules would affect deals that were completed Monday or thereafter. 

“If people were looking for a shoe to drop, it was more of a slipper,” one downtown official said about the new rules.

But Rosenthal stressed that businesses have been put on notice to expect more out of Obama’s team. 

The new rules, he said, went about as far as they could on deferred corporate earnings. They also tightened around the margins the rules governing when a company can merge with a foreign outfit and then reincorporate abroad. 

But the administration left alone, for now, perhaps an even bigger target: “earnings stripping,” in which a U.S. company gets a loan from its new foreign parent and then takes a tax deduction for the interest on its new debt.

Rosenthal said he expected that the White House would wait to gauge the corporate response to the first set of proposals before doing anything else, though dealing with earnings stripping could be an even more delicate task.

“This was a feeler by Treasury,” he said. “Treasury’s now going to be watching the market response, and I think I would look for the next two to four weeks to see if these deals continue.”

Both the business community and the White House have to wrestle with even longer-term effects of the new rules.

Republicans have long said that only a broad overhaul of the tax code can truly solve the inversion problem — in part because smart corporate tax lawyers would always find new holes to poke in the system once others were closed.

“They are addressing the loopholes of the past,” Rosenthal said about the Treasury Department. “But what about the loopholes of the future?”

Lobbyists also said that the new rules — and the attention that Washington has given to inversions — could cause companies to reevaluate the offshore deals. 

The business community had bet months ago that a Congress known for gridlock would be unable to strike a deal on inversions. 

So far, that’s turned out to be true. But as Democrats made inversions into more of a campaign issue, Lew reversed his previous stance that there was little the administration could do to curb the deals.

The downtown official said the increased attention on the deals would put more pressure on brand names like Burger King and Walgreen Co., which backed away from moving to Switzerland in August.

The more expensive inversion deals, like the AbbVie and Medtronic mergers, are happening in the pharmaceutical and medical fields.  

“There are still going to be some companies that find out the bad press, the bad publicity, and the black eye from the administration will be worth the billions they could save,” the downtown official said.