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A Tim Hortons coffee franchise stands next to a Burger King outlet in a Toronto food court. Burger King are in talks to take over Tim Hortons in a deal which would create the world's third largest quick service restaurant chain, though the two food outlets would remain as stand alones.Photo: Chris Young for The Globe and MailChris Young/The Globe and Mail

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Prompted by a wave of so-called "tax inversion" mergers in which U.S. companies do deals in order to leave their American address – and some of their corporate tax bill – behind, the Obama administration hastily issued new tax rules last fall.

The crackdown was partly prompted by the public backlash last summer over Burger King Worldwide Inc.'s $12.5-billion takeover of Tim Hortons Inc. President Barack Obama accused corporations like the U.S. burger chain of "gaming the system," referring to deals such as the one that allowed Burger King to relocate its headquarters to Canada, to enjoy a lower nominal corporate tax rate and the ability to repatriate its overseas profits tax free. One outraged Democratic U.S. senator called for a boycott and urged Americans to eat at Wendy's or White Castle instead.

To many, it appeared the flow of corporate headquarters out of the U.S. would be stopped cold by the new U.S. rules, issued by the U.S. Treasury in September 2014. And indeed, many lawyers with top Canadian firms who work on these deals say they have dried up. But some say U.S. companies may still seek to merge with Canadian partners for tax reasons, and the new rules are not necessarily big obstacles for all future deals.

"What I have heard – I haven't seen it yet – is smaller U.S. companies, mid-cap, particularly in pharma, might continue to look to do one of these deals," said Peter Keenan, a partner in the New York office of Torys LLP who works on cross-border mergers. "I think we'll see some activity. It certainly won't be as robust as last year."

The new rules do make a full-blown tax inversion more difficult by banning a practice known as "hopscotching." Hopscotch loans are a method by which U.S. companies that have moved their headquarters to a lower-tax jurisdiction can transfer money from a foreign subsidiary to their new foreign parent. But now, such loans will still be subject to U.S. tax. (In Canada and most other industrialized countries, tax treaties usually allow this money to come home to a parent company without paying tax.)

But tax inversions where moving this money is not a key goal could still be worthwhile, Mr. Keenan says, particularly in deals driven by other business reasons. Companies anticipating large future overseas revenues, and hoping to move them back home without paying U.S. taxes, could still benefit.

As outlined in a report Mr. Keenan and some of his partners published on Torys LLP's website, the new rules also pledge to review transactions going back three years before a tax inversion merger. This move is designed to catch attempts to "skinny down" a U.S. company in order to get past the so-called "80 per cent rule," which demands that in any tax inversion, former shareholders of the U.S. company must own less than 80 per cent of the stock of the new parent.

Mr. Keenan argues this move will not stop "most inversions with a compelling business purpose." Another measure to target "cash box" foreign partner corporations would also have a "modest effect."

There is also a list of more dramatic proposed measures before Congress – as well as proposals for more comprehensive U.S. tax reform – but Mr. Keenan and other observers say many are unlikely to proceed given Washington's political gridlock.

"There's still legislation out there, proposed by Democrats," Mr. Keenan said. "I consider that dead."

Still, few expect the rush of tax inversions to return to the heady levels of recent years. The crackdown did manage to scupper last summer's massive announced $54-billion merger between North Chicago, Il.-based pharmaceutical company AbbVie Inc. and Dublin-based Shire PLC.

"There has clearly been a chill on inversions since the U.S. Treasury released their reforms," said Toronto lawyer Emmanuel Pressman of Osler, Hoskin & Harcourt LLP, which acted for Tim Hortons. "At their core, inversions are strategic M&A transactions. So, there will still be opportunities. However, the political climate and the regulatory landscape have changed in a manner that will affect volume and activity."

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