A number of U.S. companies have been merging with foreign firms and moving their corporate headquarters overseas in an effort to dodge U.S. taxes. It’s a process known as corporate inversion, and it’s about to get a little harder, thanks to new rules from the U.S. Treasury Department.
According to The New York Times, any inversion deals that close on or after Monday’s announcement will be subject to the new rules.
“But they could include pending inversion deals, like the one involving AbbVie, an Illinois-based pharmaceutical company that is in the process of acquiring its smaller British rival, Shire, or the Minneapolis medical device maker Medtronic, which is acquiring Covidien in Ireland,” the Times said. Burger King is also in the process of acquiring Tim Hortons, a Canadian coffee and doughnut chain.
According to CNN Money, some of the rule changes include:
- “Hopscotch” loans. Some inverted companies have been avoiding paying taxes on dividends by dispensing their earnings as a loan to the foreign company. “Treasury will now consider such loans as ‘U.S. property’ in many instances and treat the money as a taxable dividend,” CNN Money said.
- Threshold revisions. The former owners of the American company can’t own more than 80 percent of the merged foreign company. “When the former American parent is more than 60 percent but less than 80 percent of the new company — as most recent inversion deals have been — the merger would be allowed but with significant tax consequences,” USA Today said.
Treasury Secretary Jacob Lew said the rule changes will hopefully make U.S. companies think twice before attempting an inversion, according to USA Today. “For some companies considering deals, today’s actions may mean that those transactions no longer make economic sense,” Lew said.
Ideally, Congress will deal with inversion issues as part of a larger reform of corporate taxes, but that won’t happen until 2015 at the earliest. U.S. Sen. Charles E. Schumer, D-N.Y., said Treasury’s actions are too limited and won’t have as much impact as is needed. The Times said:
“Certainly they made a good effort, but what this administrative action shows is that the only real way to stop inversions is legislative,” Mr. Schumer said in an interview. In particular, he said Congress must pass legislation that stops a practice known as “earnings stripping.” That is when a parent company loads up a United States subsidiary with debt, the interest on which is deductible, to avoid paying taxes on income. Mr. Schumer also said Congress should define an inversion more tightly.
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