By Richard Rubin and Jared S. Hopkins
Inversions are starting to revert.
When Mylan moved its corporate address to the Netherlands in 2015, the pharmaceutical company joined a wave of corporate inversion deals aided by tax advantages of a non-U.S. address. Now, Mylan's address is coming back to the U.S. through a merger deal this week with part of Pfizer Inc., a sign that the 2017 tax law is rendering these moves less attractive than they once were.
The deal comes a month after Allergan PLC -- another inverted pharmaceutical company, based in Dublin -- announced its return to a U.S. parent through a sale to AbbVie Inc.
On balance, say tax lawyers and analysts, foreign addresses still confer a slight tax advantage.
But after the U.S. corporate tax cuts in the 2017 law, the edge is small enough that it might not be worth reputational and political costs.
Those changes might deter new inversions and cause inverted companies to retake U.S. addresses if other business reasons warrant such a move. Inversion deals were particularly hot from 2012 to 2015, as companies such as Eaton Corp. and Medtronic PLC took foreign addresses.
The moves generated political blowback as lawmakers criticized companies as abandoning the U.S. The dust-up led to new regulations and provided some of the impetus for the 2017 tax-code rewrite.
"Transactions that historically would have been structured as inversions are no longer being structured that way, even when the opportunity to do it is clearly there," said Robert Willens, a New York tax analyst. "Before, there was such a clear economic advantage to structuring as an inversion that you were willing to withstand the negative aspects."
Earlier this decade, companies had strong incentives to take non-U.S. addresses. U.S. companies owed the full 35% tax rate on their world-wide income, though they got credits for foreign taxes and deferred the U.S. layer until they repatriated money.
Foreign-based companies didn't face that second tax layer. And they could use a technique called earnings stripping, loading U.S. operations with deductible expenses and pushing profits into lower-taxed jurisdictions.
Through mergers, companies such as Allergan, Mylan, Medtronic and Johnson Controls PLC moved tax addresses abroad. The companies were often managed from the U.S.
"It was always a fiction that they were foreign," said Steve Wamhoff, director for federal tax policy at the Institute on Taxation and Economic Policy, a liberal group critical of corporate tax avoidance.
Obama administration regulations curbed some benefits. Then, the 2017 law cut the U.S. corporate tax rate to 21% from 35%, reducing incentives for profit shifting and using foreign-parented companies.
"The Trump administration's response to this whole situation was to cut corporate taxes enough that corporations don't really need to try that hard to avoid them," Mr. Wamhoff said.
The law also aimed at earnings stripping by adding a tax on certain cross-border transfers within companies.
"It's too early to say definitively that the playing field is level, but it is more level today than it was," said Bret Wells, a law professor at the University of Houston.
Because companies changed addresses without necessarily moving jobs or operations, inversions had limited economic effects. But the moves reduced federal revenue and disadvantaged U.S. companies competing against inverted firms.
In this week's deal, Pfizer's off-patent drug division will merge with Mylan, best known for the EpiPen emergency allergy treatment. The new, yet-unnamed company is expected to be among the biggest sellers of generic and off-patent medicines, with more than $19 billion in yearly sales.
Favorable corporate tax conditions resulting from the 2017 law contributed to the decision to domicile the new company in the U.S., according to people familiar with the merger. But an important reason was also Delaware's attractive corporate-governance rules for shareholders, according to Mylan and Pfizer.
"That's a very important part of the investment thesis," Albert Bourla, Pfizer's chief executive, said in an interview.
Analysts and investors had criticized Mylan's Dutch governance structure. Mylan's decision to become a Dutch corporation through an acquisition while keeping its headquarters in Pittsburgh was seen as defensive. Afterward, Mylan engaged in a takeover battle with rival Teva Pharmaceutical Industries Ltd. Mylan fended that off after setting up a foundation, called a stichting in Dutch, that triggered a Dutch variation on a poison pill.
Mylan's chairman, Robert J. Coury, told analysts this week that governance played a greater role than tax for Mylan's exit from the U.S. At the time of the inversion he endorsed inverting and its tax benefits in a USA Today commentary.
Allergan referred comment to AbbVie, which said in a written statement that remaining a U.S.-incorporated company was the most appropriate structure for the company.
Under the new tax system, there are still benefits to a non-U.S. address, because it can help companies avoid a new minimum tax on U.S. companies' foreign income. Also, the parent's address is only part of tax calculations. Some companies can still reduce U.S. taxes by reporting profits abroad or investing in foreign factories.
--Jonathan Rockoff contributed to this article.
Write to Richard Rubin at email@example.com