The U.S. Treasury Department issued rules Thursday aimed at stemming the practice of “tax inversions.” This is the practice where a company moves its legal home abroad in order to avoid or minimize U.S. taxes.
The rules are meant to stem a technique, used after a company moves its legal address to a low-tax country, called earnings stripping. When the company moves abroad or gains a foreign corporate parent, the company minimizes its U.S. taxes by receiving a loan from the foreign-based company and paying deductible interest to that foreign parent or affiliate.
This technique means a company can generate large interest deductions without having to invest in the United States. Getting at this lost tax revenue has been a priority of the Obama administration.
The rules limit those loans that leave the U.S. company owing less to the Treasury. The rules were proposed in April, but have been softened in part because of opposition from business groups like the U.S. Chamber of Commerce. The Chamber reiterated its objections in a statement:
“The U.S. Chamber had significant concerns about the impacts of these rules when proposed, and we’re still examining this final rule. While it appears that Treasury may have attempted to address at least some of the Chamber’s concerns, we continue to believe punitive, one-off changes to the tax law do nothing to address the root of the purported “inversion problem”: our antiquated and anticompetitive (sic) tax code. If we are seeking to make the United States a competitive place to do business, we need to focus on achieving comprehensive tax reform.”
The Chamber had filed suit after the rules were announced. One of the main complaints is that the changes hamper a company’s ability to manage its finances.
The New York Times reports the changes to the tax rules, even their suggestion, had immediate consequences.
“The Treasury’s rules in April also took aim at the $152 billion deal between Pfizer and Allergan. The Treasury prohibited what it called “serial inverters,” or companies that have completed three or more deals with American companies over a short period of time. That broke up the merger between the two pharmaceutical giants, given that Allergan was the product of multiple levels of inversions.
“Thursday’s changes provided exemptions for cash pools and short-term loans, which are used by multinational companies to move cash among their subsidiaries across the world.
“It also said that the regulations made special exceptions of types of entities, including foreign subsidiaries of American corporations, S Corporations, regulated financial and insurance companies and mutual funds and real estate investment trusts. The amendments also made exceptions for ordinary business transactions, such as purchasing stock as part of compensation plans.”
The Associated Press reported on congressional reaction to the new Treasury Department rule changes.
“Republicans quickly criticized the rules. Sen. Orrin Hatch, R-Utah, warned they “could jeopardize American businesses and the U.S. economy.”
“But Democrats countered.
” ‘If Republicans are serious about reforming our tax code and making it fairer for all Americans,’ said Michigan Rep. Sander Levin, top Democrat on the tax-writing House Ways and Means Committee, ‘they should begin by joining with Democrats to pass legislation to close corporate tax loopholes.’ “