(Newswire.net — September 26, 2014) — “This action will significantly diminish the ability of inverted companies to escape U.S. taxation,” Treasury Secretary Jacob Lew said, referring to the new rules to crack down on the tax inversion schemes. He added that for some companies considering inversions, the new measures would mean inverting would “no longer make economic sense.”
Administration officials who briefed reporters could not say how many pending inversions might be stopped by the new rules, and specifically would not address whether the rules would block one of the most high-profile moves – an effort that Burger King announced in August to acquire Tim Hortons, a Canadian coffee and doughnut chain.
A number of US corporations were labeled “unpatriotic” for engaging in tax inversion, where an American company buys up a foreign one and then moves their headquarters to the host country to take advantage of the lower corporate tax rates.
Tax inversions are a form of tax avoidance driven by a combination of factors, but the most prevalent factor is that the US tax code (uniquely among developed nations) seeks to impose income tax on profits earned abroad by American corporations. This creates a strong incentive for American companies with large overseas markets to seek to characterize themselves as a foreign corporation if they want to return foreign earnings to stockholders without double taxation.
America’s corporate tax rate is 35 percent, while countries such as the UK enjoy a rate of 20 percent and Ireland a rate of 12 percent. Lower corporate taxes are believed to be the reason why, earlier this year, Pfizer was trying to buy Britain’s Astra Zeneca and move its headquarters to the UK.
The deal fell through because an agreement couldn’t be reached on a price, but estimates are that without rule changes the US could lose $19.5 billion in tax revenue over ten years through inversion, according to the Congressional Joint Committee on Taxation.
Fifty corporations, including Carnival Cruises and Michael Kors, have already taken advantage of the practice, according to the Congressional Research Service. In such transactions, a US 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.
However, revising tax laws is a lengthy process, leading the US Treasury to announce a new set of rules to close the loopholes.
“While there’s no substitute for congressional action, my administration will act wherever we can to protect the progress the American people have worked so hard to bring about,” Obama said in a statement.
Coming just six weeks ahead of Election Day, the timing of Monday’s announcement highlighted the appeal Democrats believe the issue has with voters. By having Treasury announce new steps now, the White House was practically daring Republicans to voice their opposition.
Three new measures will seek to prevent companies from creating ways to access earnings from a foreign subsidiary without paying US taxes through “hopscotch” loans, in which companies shift earnings by lending money to the new foreign parent company while skipping over the US-based company, according to the Associated Press.
Another rule change would make it harder for merged or acquired companies to benefit from lower foreign taxes by tightening the law over US shareholders that own less than 80 percent of the new combined company.
“Today’s actions will make inversions substantially less economically appealing, but as I’ve said, there are limits to what we can do administratively, which is why it is incumbent upon Congress to pass anti-inversion legislation when they return in November,” the US treasury secretary concluded.