(Bloomberg) The U.S. Treasury Department’s proposed rules to prevent companies from taking a foreign address have ended one deal and forced another to get more expensive financing.

Salix Pharmaceuticals Ltd., based in Raleigh, North Carolina, said it would halt its merger agreement with Italy’s Cosmo Pharmaceuticals SpA., and Medtronic Inc. said it would need external financing for its purchase of Covidien Plc.

“They’ve thrown a lot of sand in the gears here,” said Marty Sullivan, chief economist at Tax Analysts in Falls Church, Virginia.

What the government hasn’t done is significantly reduce the benefits of a foreign tax address, as illustrated by the continued efforts of Salix and Medtronic to escape U.S. taxation.

Salix is considering getting a foreign tax address without an inversion, by selling itself to already-inverted Actavis Plc, according to people with knowledge of the matter. And Medtronic is still proceeding with the Covidien purchase.

The Treasury Department announced its proposal on Sept. 22, after Congress left Washington for the campaign season without voting on any inversion-related tax bills.

“The changed political environment has created more uncertainty regarding the potential benefits we expected to achieve,” Salix Chief Executive Officer Carolyn Logan said in the statement on the Cosmo deal.

Hopscotch Loans
The rules, which will be effective for deals that close on or after Sept. 22, address some of the techniques U.S. companies have been using to move their tax addresses outside the country.

Notably, they prevent so-called hopscotch loans like the one Medtronic had planned on using. Those loans let companies access foreign earnings that would be subject to U.S. tax if repatriated by loaning them from a foreign subsidiary to the new foreign parent company.

“Despite the additional expense of the new financing, the strategic benefits of the transaction remain compelling,” Medtronic said in a statement about the purchase that would shift its tax residence to Ireland from Minneapolis.

That move shows that the Covidien-Medtronic deal is about more than just taxes, said Robert Willens, a tax consultant in New York. “This deal still makes business sense,” Willens said in an e-mail.

Tax Laws
Tax laws limited Treasury’s ability to act. For instance, the Obama administration wants to prevent U.S. companies from inverting by buying a smaller foreign business. To do so, it would need to revise a formula for determining when inversions get penalized. Congress set those numbers in 2004 and only Congress can change them.

The Treasury Department also hasn’t issued new rules on earnings stripping, the practice that inverted companies use to load up U.S. operations with debt and effectively shift taxable profits outside the country to jurisdictions with lower tax rates.

In its Sept. 22 statement, Treasury said it’s still considering rules in that area.

As a result, U.S. companies can still seek the advantage of a foreign tax address by being bought. In Salix’s case, a purchase by Actavis would allow earnings stripping and would put future foreign profits outside the U.S. government’s reach.

‘Foreign Status’
“This is what they want to do,” Sullivan said of Actavis. “They want to take advantage of their foreign status, foreign resident status and they want to acquire U.S. companies.”

David Belian, an Actavis spokesman, didn’t respond immediately to a request for comment.

Republicans have been warning that the logical extension of the administration’s approach would be more foreign takeovers of U.S. companies.

—With assistance from Simeon Bennett in Geneva.

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