Inversion Notice 2015-79 restricts the location of the new foreign parent company, further constraining tax inversions.
As discussed in an earlier blog post, sections 2.02(a) and 2.02(b) of Notice 2015-79 will, in most cases, require that the new foreign parent in any inversion be organized and tax resident in the country of the primary foreign target. These rules will tend to favor inversions to countries where the foreign target is already organized and tax resident – a typical scenario where the foreign target has itself inverted (although not the only applicable acquisition scenario).
However, this is the exact scenario in the Pfizer-Allergan inversion merger. Pfizer is inverting to Ireland. Allegan was acquired in 2015 by a U.S. company, Activis, that had inverted into Ireland in 2013 in its acquisition of a Bermudian company, Warner Chilcott. Warner Chilcott became a Bermudian company in 2006 when it was taken private. Its assets had been acquired in 1996 by an Irish company (Nale Laboratories), which changed its name to Warner Chillcott and was then acquired by a Northern Ireland company (Galen, which also changed its name to Warner Chillcott).
If section 2.02(b) was in place in 2013, it is likely that Activis could not have inverted into Ireland by acquiring Warner Chillcott, which was then a Bermudian company.
“New Pfizer” is the child of a series of inversions and foreign acquisitions stretching back some 20 years. Is Treasury’s next step going to be to devise restrictions specifically targeted to these types of “serial inversions?” This could prove challenging, as there are numerous possible fact patterns that would need to be addressed. However, as more U.S. companies, and larger ones, invert, the perceived need of Treasury – and eventually of Congress – to take action will increase exponentially. For example, Pfizer reported in 2014 around $74 billion in earnings permanently reinvested outside the U.S., and may have up to the same amount of foreign earnings not reported as permanently reinvested outside the U.S.
The stakes are huge. However, it appears that Pfizer will not be affected by the current inversion legislation, as its shareholders will own only around 56 percent of the new combined company, well short of the triggering 60 percent threshold under current law.
Notwithstanding that section 2.02 will not affect the Pfizer transaction, these restrictions will place significant limits on future inversions, and may also turn out to be extremely effective in conjunction with other proposed provisions. For example, suppose the new Model Treaty limitation on withholding on payments from expatriated entities is added to the U.S.-Ireland tax treaty.