US Treasury to crack down on tax-advantaged corporate 'inversions' overseas

Out-Law News | 24 Sep 2014 | 11:26 am | 2 min. read

New anti-avoidance measures published by tax authorities in the US will discourage the use of cross-border mergers to artificially reduce corporate tax bills, the US Treasury has said.

Together with the Internal Revenue Service (IRS), it has published a series of policies designed to reduce the tax benefits of corporate 'inversions', which occur when a US-headquartered multinational company restructures so that the US parent company is replaced by a company in a lower tax jurisdiction. According to the Treasury notice, the practice "erodes the US tax base" by allowing companies to avoid the US taxes they would otherwise be required to pay.

Burger King's potential acquisition of the Canadian coffee shop chain Tim Hortons is one of the highest profile inversion deals announced by US companies in recent months which may be affected by the new rules, although they will not apply to deals that have already closed.

 A number of pharmaceutical firms have been involved in inversion arrangements this year, the most recent of which was AbbVie's purchase of UK company Shire. Healthcare shares listed on the FTSE fell in price on Tuesday, as a result of concerns that the US move would adversely impact on M&A activity in the sector..

"These first, targeted steps make substantial progress in constraining the creative techniques used to avoid US taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and when possible, stopping them altogether," said Jacob Lew, the US treasury secretary.

"While comprehensive business tax reform that includes specific anti-inversion provisions is the best way to address the recent surge of inversions, we cannot wait to address this problem. Treasury will continue to review a broad range of authorities for further anti-inversion measures as part of our continued work to close loopholes that allow some taxpayers to avoid paying their fair share," he said.

The new policy will prevent inverted companies from using certain complex loan structures to transfer funds to the new foreign parent company as a way of deferring their US tax liabilities. It will also prevent inverted companies from restructuring a foreign subsidiary in order to access the subsidiary's earnings tax free. The US Treasury is also introducing anti-avoidance measures that will effectively strengthen the requirement that the former owners of the US company own less than 80% of the new foreign company.

In a fact sheet setting out the details of the new policy, the US Treasury said that the changes would result in some potential cross-border mergers no longer making "economic sense".

"Genuine cross-border mergers make the US economy stronger by enabling US companies to invest overseas and encouraging foreign investment to flow in to the United States," it said. "But these transactions should be driven by genuine business strategies and economic efficiencies, not a desire to shift the tax residence of the parent entity to a low-tax jurisdiction simply to avoid US taxes."

US president Barack Obama flagged inversions as a risk to the country's tax receipts more than two years ago in his framework for business tax reform, but to date the country's lawmakers have struggled to reach agreement on anti-inversion legislation. The US Treasury said that it would continue to examine ways to reduce the tax benefits of inversions, including through additional regulatory guidance as well as by reviewing the country's tax treaties and other international commitments.

Tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that corporate inversions were a symptom of "wider issues in the US tax system" which the changes would do little to resolve.

"US multinationals have some $2 trillion held offshore – this is an unstable situation, but real reform is politically very difficult," she said. "These new measures are a sticking plaster which will make inversions more difficult, but will not solve the underlying issues."