New U.S. tax rules chill 'inversion' deal-making; shares dive

* U.S. moves against tax-avoidance "inversion" deals

* Burger King-Tim Horton deal to proceed

* Action may deter Pfizer (NYSE: PFE - news) from returning to bid for AstraZeneca (Recasts with Medtronic (NYSE: MDT - news) comments, update stock moves)

By Kevin Drawbaugh and Soyoung Kim

WASHINGTON/NEW YORK, Sept 23 (Reuters) - Tough new U.S. rules on corporate "inversions" on Tuesday sent a chill through the market for the tax-avoidance deals, both pending and potential, with share prices falling sharply in nearly a dozen companies on both sides of the Atlantic.

As investors sold stocks involved in inversions, in which U.S. companies escape high taxes at home by redomiciling abroad, analysts and tax lawyers were surveying the damage to deals currently in the works and the outlook for future transactions.

Despite new rules that will make some inversions costlier and others more difficult to do, Burger King Worldwide Inc (NYSE: BKW - news) said it will proceed with its $11.5 billion deal with Canada's Tim Hortons Inc (NYSE: THI - news) , stressing that the transaction was not about tax benefits.

In announcing their intention to proceed, the two companies said in a statement: "This deal has always been driven by long-term growth and not by tax benefits."

The U.S. Treasury Department unveiled harsher-than-expected changes late on Monday to the existing rule book for inversions, which have surged this year and caused concern in Washington about the threat posed to the U.S. corporate income tax base.

Effective immediately, the rules will mean little for companies that have already inverted. But for at least 10 companies in the midst of completing such deals, and for those considering inversions, the impact will be significant.

Most pending deals could become more costly for the buyers, such as AbbVie Inc (Xetra: 4AB.DE - news) and its $54.7 billion deal to acquire Ireland (Other OTC: IRLD - news) 's Shire Plc (LSE: SHP.L - news) , as well as Medtronic Inc and its $42.9 billion takeover of Covidien Plc (NYSE: COV - news) .

Neither of these transactions, the biggest of the year, was expected to fall apart completely, partly because paying a break-up fee to walk away would likely be even more costly. AbbVie would have to pay Shire a $1.6 billion penalty if it were to renege on their merger agreement, for instance.

Medtronic has a contract that lets it or Covidien walk away from their deal if the U.S. Congress changes tax law. The Treasury's new rules fall short of that, so a break-up fee likely would loom in this case, too, if the merger were called off.

'HOPSCOTCH' LOANS TARGETED

With a grid-locked Congress failing to act, investors had been expecting an Obama administration clamp-down on inversions. But the rules it announced were more far-reaching than anticipated, analysts at Deutsche Bank (Xetra: 514000 - news) said.

"Inversion deals now are clearly going to be very difficult to pull off," said Navid Malik, head of life sciences research at Cenkos Securities.

An inversion typically involves a U.S. company buying a smaller, foreign rival and reincorporating in its home country, where taxes are lower, opening a range of options for the combined business to lower its U.S. and global tax bills.

About 50 such deals have taken place since the early 1980s, but the pace has picked up, with half of them completed since the 2008-2009 credit crisis, according to a Reuters review.

A key target of the Treasury's actions is foreign profits held offshore by U.S. multinationals under a tax rule that defers taxes on profits until they are brought to the United States.

One of the new Treasury rules will prevent inverted companies from using "hopscotch" loans that allow them to avoid dividend taxes when tapping tax-deferred foreign profits.

Another rule will bar inverters from gaining access to offshore profits by using "decontrolling" strategies that restructure foreign units so they are no longer U.S.-controlled.

The Treasury is also tightening limits on the levels of ownership that the former U.S. investors can have in an inverted company for it to qualify for foreign tax treatment under U.S. law, a move that will make it harder to do the deals.

The U.S. Treasury has acknowledged that one of the new rules is broad enough to hit companies that are not inverting. A senior official, who asked not to be named, said some cash transfers from foreign corporations to U.S. subsidiaries could now be taxed, even if not involved in an inversion.

"There's a relatively small provision ...which would affect both inverted and non-inverted, basically any foreign-owned firms," the official told reporters on Monday.

Treasury officials said on Tuesday that the rules were effective immediately and that any deals completed as of Monday were not affected, while deals completed later would be. Despite this, some investment bankers on Tuesday expressed uncertainty about the finality and timing of the rules.

Bankers and analysts also said they expect more from the Treasury Department. "This move is a good and necessary start toward discouraging corporate inversions, which cost U.S. taxpayers billions in lost revenue," said Thomas Hungerford, a tax expert at the Economic Policy Institute, a think tank.

SHARES REACT

No two inversions are exactly alike, so the impact of the rules will depend on the aspects of inversion each deal emphasizes, whether it is protecting foreign profits from U.S. taxation or gaining access to foreign profits already deferred.

In London, AstraZeneca (NYSE: AZN - news) , which had been the target of a failed inversion bid by U.S. drugmaker Pfizer Inc, slid 3.6 percent. The Treasury rules were seen as possibly deterring Pfizer from making another bid after a $118 billion takeover attempt failed in May.

AbbVie slid 2.3 percent in midday U.S. trading, while Pfizer, the biggest U.S. pharmaceutical company, dipped 0.3 percent. Burger King was down 2.2 percent in New York.

AbbVie officials did not have any immediate comment on the latest developments.

Other U.S.-listed issues under pressure from the Treasury actions included Abbott Laboratories (Xetra: 850103 - news) , down 1.6 percent; Covidien, down 2.4 percent; Medtronic, down 3.1 percent; and Mylan (NasdaqGS: MYL - news) , down 0.1 percent. (Additional reporting by Dan Burns in New York, Ben Hirschler in London, Lisa Baertlein in Los Angeles, Solarina Ho in Toronto, Jason Lange and Emily Stephenson in Washington; Editing by Leslie Adler and Dan Grebler)