US Treasury Seeks To Dampen The Corporate Inversion Flood But Is It Really As Bad As Talking Heads Report?

On Tuesday morning the US Treasury announced its new action plan to dampen the rate at which mergers and acquisitions are happening. M&A activity has been furious through the end of 2013 and throughout 2014. The Treasury Department thinks that a majority of M&A activity as of late has been the result of an incentivised business ecosystem attempting to seek lower expenses and higher revenues.

Specifically the Treasury seeks to:

• Prevent inverted companies from accessing a foreign subsidiary’s earnings while deferring U.S. tax through the use of creative loans, which are known as “hopscotch” loans.
• Prevent inverted companies from restructuring a foreign subsidiary in order to access the subsidiary’s earnings tax-free.
• Close a loophole to prevent an inverted companies from transferring cash or property from a CFC to the new parent to completely avoid U.S. tax.
• Make it more difficult for U.S. entities to invert by strengthening the requirement that the former owners of the U.S. entity own less than 80 percent of the new combined entity.

Capital IQ highlighted well before “corporate inversion” became a mainstream media buzzword that a surprisingly small of amount of big ticket M&A deals were actually classified as “corporate inversions”. Only 1.4 percent of the global 518 worldwide M&A deals prices above $1 billion are classified as “corporate inversions”. In fact between 1994 and 2000 some 17 deals were inversions and now from 2009 to present some 35 deals are classified as inversions.
Instead of the US Government admitting that it is mostly responsible for creating this environment it has decided to introduce punishment into the mix instead of introducing incentives.

The entire corporate inversion debacle can be traced to how relatively restrictive the US can be to multi-national companies. Going even further, in most instances the US is very loose but now that the general public is aware of the “Cayman Islands” accounting trick or Google's "Double-Irish Dutch-sandwich" accounting methods, the government must respond.

There are too many hands touching on our “Free market” and the influences of these hands have the potential to drive markets away from natural equilibrium which in turn means a snap back to equilibrium will be very rocky as global governments do whatever is in their power to make their system appear relatively stronger than the next.

Instead of doing laundry, we’re searching for the cleanest dirty shirt and that is no way to go about managing fiscal prudence.