NCPA - National Center for Policy Analysis

Obama Administration Issues New Rules to Combat Tax Inversions

September 24, 2014

The Treasury Department tightened tax rules Monday to deter U.S. companies from moving their legal headquarters to lower-tax countries, part of a White House effort to slow a wave of so-called corporate inversions that effectively reduce federal revenues.

Treasury officials took action under five sections of the U.S. tax code to make inversions harder and less profitable, removing some of the appeal that has made the transactions more common in recent years, particularly in the pharmaceutical industry.

  • In an inversion, an American company reincorporates for tax purposes in a tax-friendlier country such as the U.K. or Ireland, typically while maintaining much of their operations in the U.S.

  • Most recent inversions sprang from mergers of a U.S. firm with a smaller foreign firm after regulatory steps taken during President Barack Obama's first term curbed other types of inversions.

Treasury officials, who had anticipated as many as 30 new inversions by year's end, said Monday they hoped that companies would examine the new rules, recalculate costs and change their minds.

Some experts questioned how much further the Treasury Department could go in limiting corporate inversions and said legal challenges to Monday's actions were possible. Others expected that firms could find ways around the restrictions.

  • Companies, for example, can make more use of profits they have parked overseas. Currently, U.S. firms leave those profits offshore, where they remain out of reach of U.S. tax authorities until the money is brought home.

  • But many companies want to make more use of the money while minimizing their U.S. tax. Inverting can help them do that in several ways, for example through so-called hopscotching, where the foreign subsidiary makes a loan of the cash to the new foreign parent, bypassing the U.S. firm.

Another change will make it more difficult for U.S. firms to skirt current ownership standards in inverting through a merger. Currently, a 2004 law basically allows inversions through a merger, as long as the old U.S. firm's shareholders own less than 80% of the resulting combined firm. Some tax planners have used various techniques to get around that limit, by artificially pumping up the size of the foreign firm's share, or shrinking the size of the U.S. firm's share. The Treasury action would prohibit those techniques.

Source:  John D. McKinnon and Damian Paletta, "Obama Administration Issues New Rules to Combat Tax Inversions," Wall Street Journal, September 22, 2014.


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