President Obama’s moves to cut down on ‘unpatriotic’ tax avoidance by US-based corporations could dent the fast-recovering market in M&A legal advice, the International Bar Association conference in Tokyo heard today. 

Damien Zoubek, partner at New York firm Cravath, Swaine & Moore, said that in the past year so-called ‘inversion’ deals have been a significant driver in overseas M&A activity. These deals enable American companies to avoid paying 35% US corporation tax on all their overseas earnings by engineering mergers with foreign companies.

‘That allows you to grow your foreign business without being subject to US tax,’ Zoubek explained. In a process known as ‘hopscotching’, company cash earned overseas can even be used to pay for the acquisition itself.

However, in a multi-pronged reform to the tax code applying to all deals closed after 21 September, the US authorities made it more difficult to gain access to offshore cash without paying US tax on it. ‘The US Treasury has eliminated the hopscotch, put a brake on a lot of inversions, especially those where you use the foreign cash to pay for the acquisition,’ Zoubek said.

However he was bullish about the M&A market as a whole, despite the stock market downturn of the past two weeks. ‘The US has incredible pent-up M&A demand, there’s a lot of cash on the balance sheets. The log-jam just broke open’. 

David Widger, head of corporate department at Dublin firm A&L Goodbody described the clamp down on inversions as ‘an extremely significant development’ for the European market.

‘US companies are looking through M&A to migrate to attractive jurisdictions like Ireland, the Netherlands and the UK and Switzerland,’ he said. Apart from lower corporation tax rates, ‘the fact that there is no cap on executive pay also seems to be an attraction’, he said. 

The new rules, which require the target company to own 50% of the new combined vehicle rather than the current 20%, are certainly slowing down the market, he said. 

However Widger sounded an optimistic note about the Irish commercial property market, where prices collapsed by 67% during the downturn.

Restructuring, including the arrival of real estate investment trusts and the creation of a ‘bad bank’ has prompted a recovery with commercial prices up 50% in a year, he said.