MOVING against tax avoidance by corporations, President Barack Obama’s administration took several actions on Monday to curb “inversion” deals that allow companies to escape high United States taxes by reincorporating abroad.
The Treasury Department announced new rules, effective immediately, that will reduce the tax benefits available to companies that have inverted, while also making new inversions more difficult to do and less potentially rewarding.
Because they took effect on Monday, the new rules may raise issues for some of a handful of companies that have agreed to do inversions, but have not yet completed them.
Fast-food chain Burger King Worldwide Inc is in the midst of inverting to Canada in a deal with coffee-and-doughnuts vendor Tim Hortons Inc.
Asked about the impact on pending deals, a senior Treasury official said on a conference call: “If they are closed and done as of today, then they are not subject to this. If they are closed tomorrow or after, they are subject to this.”
Obama, who has sharply criticised inverting companies, said the steps would discourage the deals, seen by some as a threat to the US corporate income tax base.
“We’ve recently seen a few large corporations announce plans to exploit this loophole, undercutting businesses that act responsibly and leaving the middle class to pay the bill, and I’m glad that Treasury Secretary Jack Lew is exploring additional actions to help reverse this trend,” he said.
Companies that do inversions, which are legal and already subject to certain restrictions, say they are only trying to minimise their tax bills, which investors expect.
About 50 such deals have taken place since the early 1980s, but half have been completed since the 2008-2009 credit crisis, according to a Reuters review.
Inversions have surged in the past year, pursued by big companies such as Burger King and medical technology group Medtronic Inc.
The deals usually involve a US corporation buying a smaller, foreign rival and re-domiciling in its home country, where taxes are lower, even though core operations typically remain in the US.
Lew said in a statement: “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.”
Steps being taken include preventing inverted companies from gaining easier access to foreign profits using “hopscotch” loans; blocking inverted companies’ tax-free access to foreign units’ earnings; and tightening limits on ownership by the former US owners of an inverted company, the Treasury said. Reuters