Treasury’s new tax rules could have far-reaching implications

There’s still a certain amount of reeling going on in the wake of the decision by Pfizer and Allergan to scrub their merger and acquisition plans. Anyone who is tuned into the business news of the day knows that the $160 billion sale of Pfizer to Allergan got shelved because new rules issued by the U.S. Treasury Department left the latter essentially too small to invert.

What happened is that Treasury announced it is changing the way it gauges the benefits of any proposed acquisitions that has one of the companies moving their legal operating address to a foreign country with a lower corporate tax structure. But some legal observers say the new rule could have even broader implications.

As it relates specifically to the Pfizer-Allergan deal, Treasury announced it would no longer include the value of the last three years of acquisitions made by a foreign-based entity in an inversion transaction when determining tax benefits. As many reports have noted, Allergan closed three major deals over that time period. Not counting them eroded the tax benefit to Pfizer and made the deal useless for inversion purposes.

Clearly, any Minnesota businesses that intend to flourish and seek to grow through acquisition need to factor tax planning in as part of their overall legal strategy. But what legal observers say the new rules could do is also force a lot of corporations to reexamine how they handle internal financing for tax purposes.

What caught the eyes of the legal reviewers was a second set of rules that Treasury issued at the same time as the one aimed at curbing so-called serial inversions. It changes how Treasury distinguishes debt and equity held by companies.

For now the rules are only proposed and the administration is taking comments through July 7. Predictions are that tax lawyers will be vocal in expressing their opposition to the changes.

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