20 September 2017

New Rules to Combat Tax Inversions

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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.

The Treasury rules will make it harder for companies that invert to use cash accumulating abroad—a big draw in recent deals. In addition, the government has made it more difficult to complete these overseas mergers.

The new guidelines could impact a number of pending mergers and acquisitions, including Medtronic Inc. 's proposed acquisition of Irish medical-device maker Covidien PLC; Salix Pharmaceuticals Ltd.’s acquisition of a division of Italy's Cosmo Pharmaceuticals SpA. It could also interfere with the merger of fruit grower Chiquita Brands International Inc. and Fyffes PLC.

Less clear is how it would impact Burger King Worldwide Inc.'s proposed acquisition of Canadian coffee-and-doughnut chain Tim Hortons Inc., a deal that was designed to move the new corporate headquarters to Canada.  That deal is structured somewhat differently, and experts disagree whether it would be affected by the new government rules. Most agree the rule changes aren't likely to end inversions altogether.

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. Treasury Secretary Jacob Lew said the administration's actions represent substantial progress against the controversial but generally legal maneuver. Many Democrats said Monday they supported the new tax rules. Top Republican leaders stopped short of denouncing the changes and instead raised questions about whether they would work as intended.

The top economist at the U.S. Chamber of Commerce released a blistering statement late Monday, saying Treasury's new guidelines would incentivize companies to create more jobs overseas. 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.

In a statement, Mr. Obama suggested that moving corporate tax addresses abroad was unpatriotic. He also opened the door to further negotiations with lawmakers over a broad tax overhaul that Republicans say is a better remedy for slowing or stopping inversions.

Experts say companies seek benefits through tax inversions by using several techniques that the new rules are intended to combat. 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.

Three of Treasury's rule changes are aimed at blocking maneuvers such as hopscotching to get access to offshore cash.

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.

Still another move would make it harder for U.S. firms to spin off subsidiaries overseas. These partial inversions also have gotten more attention lately, as firms and advisers seek to move more assets out from under the U.S. tax system.

Click here to access the full article on The Wall Street Journal. 

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