New regulations from the Treasury Department will make inversions less lucrative by barring creative techniques that companies use to lower their tax bill. Additionally, the U.S. will make it harder for companies to move overseas in the first place by tightening the ownership requirements they must meet.
“This action will significantly diminish the ability of inverted companies to escape U.S. taxation,” Treasury Secretary Jacob Lew said. He added that for some companies considering inversions, the new measures would mean inverting would “no longer make economic sense.”
In an inversion, a U.S. business merges with or is acquired by a foreign company in a country with a lower tax rate. President Barack Obama has denounced inversions as unpatriotic and has urged Congress to stop them.
Obama applauded the Treasury’s action, but said he was still calling on Congress to pursue broader tax reform that would reduce the corporate tax rate, close loopholes and make the tax code simpler.
Monday’s announcement puts companies on notice that the Treasury will be drafting regulations to clamp down, but the new measures will take effect immediately even while those regulations are pending. That means any transactions from Tuesday onward will be subject to the tougher restrictions.
Three new measures will seek to stop companies from finding ways to access earnings from a foreign subsidiary without paying U.S. taxes, including “hopscotch” loans, in which companies shift earnings by lending money to the new foreign parent company while skipping over the U.S.-based company.
Another measure makes it harder for companies to qualify for inversions by tightening the application of a law that says the American company’s shareholders must own less than 80 percent of the new, combined company. Some companies use complex transactions that adjust their ownership stake in order to qualify. The Treasury regulations would prohibit certain schemes, such as a firm making large dividend payments ahead of the acquisition to reduce its size on paper.
Treasury called the new rules a “targeted action” aimed at ensuring that only genuine cross-border mergers that strengthen the economy are incentivized by the U.S. tax system.
Democrats generally supported the action as the best the administration could do without action from Congress while Republicans faulted the administration for not making a greater effort to work with Congress to enact comprehensive corporate tax reform.
“We’ve been down this rabbit hole before and until the White House gets serious about tax reform, we are going to keep losing good companies and jobs to countries that have or are actively reforming their tax laws,” said Rep. Dave Camp, R-Mich., who chairs the tax-writing House Ways and Means Committee.
About the Author
