The Obama administration just can't win. Despite a crackdown on foreign mergers that help American firms slash their tax bills, a slew of overseas takeovers continue to rob the Treasury Department of tax revenue.
New Treasury Department regulations, announced in September, squashed many of the incentives for tax-driven mergers called "inversions," which were all the rage last year. Huge U.S. companies were cutting down what they owed Uncle Sam by purchasing smaller foreign firms and moving their tax home abroad -- typically to countries with lower corporate rates.
Burger King used the maneuver. So did medical device maker Medtronic. Critics said that mega corporations were essentially changing their address to avoid paying the IRS.
Now, a new tactic has emerged -- and this time, American companies are the takeover targets. Experts say the crackdown has encouraged companies looking for a tax advantage to reverse the process, turning smaller American firms into attractive targets for large foreign rivals, and still bypassing the Treasury rules.
"The Treasury regulations have had a chilling effect on the market for the moment, but the underlying forces are powerful enough that deals will happen in different ways," said Mihir Desai, a business and law professor at Harvard University.
"Larger foreign firms are now advantaged acquirers of U.S. assets and American companies are more likely to become smaller via divestitures to facilitate these transactions," he said.
Related: Crazy corporate tax loopholes? 'Inversions' are small potatoes
There have been $133 billion of inbound, cross-border deals since Treasury proposed its regulations, according to Dealogic. That's 30% more than the $102 billion in deals announced the same period a year ago, and much higher than the $97 billion recorded two years ago.
One example of the trend is North Carolina-based Salix Pharmaceutical (SLXP). The drugmaker said last July that it was in talks to complete an inversion deal by acquiring the smaller Irish arm of Italian drugmaker Cosmo Pharmaceuticals. But Salix called the merger off early October, within two weeks of Treasury unveiling its plan.
In a surprise turn, Salix announced last month it would instead be acquired by Canadian drug firm Valeant (VRX), which is six times bigger by market cap. The deal, once completed, will allow Salix to move its tax home to Canada, a country with lower corporate tax rates -- all while getting around tighter inversion restrictions.
It's a case of history repeating itself -- Valeant used to be U.S. company, but jumped across the border in its own inversion merger in 2010 with smaller Canadian firm Biovail.
Related: 5 fat roadblocks in the way of corporate tax reform
The government has yet to issue rules to implement the measures announced in September, but Treasury Secretary Jack Lew did suggest making the regulations retroactive to the date of the announcement, said Eric Toder, a tax policy expert at the Urban Institute.
"We need to fix underlying problems in our tax code through business tax reform to address inversions and other creative tax avoidance techniques," said a Treasury spokesperson. The agency said it plans to issue further guidance to limit inversions, but hasn't given a timeline.
The fact remains that an overhaul of the corporate tax code is easier said than done, and more foreign takeovers are likely to come in the near future as the government debates new regulations.
Kurt Rademacher, a London-based tax attorney at Butler Snow, said that companies are worried that upcoming rules will make tax-driven inversions impossible.
U.S. corporate tax rates at 35% are "higher than most of the developed world, and so long as that situation persists, multi-nationals will continue to look for ways to limit Uncle Sam's bite at the apple," Rademacher said.
