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US Treasury raises new barriers to tax-evading mergers

US Secretary of the Treasury Jacob Lew speaks during a meeting of the Financial Literacy and Education Commission at the Treasury Department on Nov 18, 2015 in Washington, DC.

[WASHINGTON] The US Treasury announced new measures Thursday to block "inversion" mergers designed to let companies avoid US taxes, placing a possible obstacle to Pfizer's potential US$150 billion takeover of Ireland's Allergan.

US Treasury Secretary Jacob Lew said the aim of the new rules is to "further reduce the benefits of an inversion and make these transactions even more difficult to achieve."

The rules aim deny tax benefits to US companies buying up smaller foreign firms and then relocating to the home base of those firms, or to a low-tax third country, to mainly to lower their corporate tax bills.

"US companies are currently taking advantage of an environment that allows them to move their tax residence overseas to avoid paying taxes in the US, without making significant changes in the nature of their overall operations," Lew said.

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"It's the Treasury's responsibility to protect the US tax base. We have repeatedly stated that we will use all of our existing administrative authority to address inversions."

The new rules deny tax benefits to inversion-type mergers that set up the combined company's official domicile in a third country.

They also make it harder to use asset transfers to evade rules that say that if the US company's shareholders own 80 per cent or more of the merged company's shares, it remains a US firm for tax purposes no matter where the headquarters are.

The new rules are in addition to those announced a year ago that aimed to stymie a raft of inversion deals, a point underscored by pharmaceutical giant Pfizer's proposal last month to take over much smaller Allergan and rebase its corporate operations in Allergan's home base of Ireland.

Because of its ultra-low corporate taxes,Ireland has been the preferred destination for inversion-based mergers.