U.S. government cracking down on corporate inversions

The U.S. Treasury Department has declared its “first, targeted steps” at making it more difficult for American companies to avoid taxes by merging with firms in other countries and moving their headquarters overseas.

A lot of US companies have been using a method of corporate inversion, which involves acquiring a foreign firm and subsequently moving abroad, as a means of avoiding high US tax rates.

Congress has been cracking down on the increase of corporate inversions taking place for months.

On Monday, the Treasury issued tax guidance that will govern all inversions that happen from now on, in addition to imposing a restriction on recent companies that have used inversion as a way of avoiding taxes.

Treasury Secretary Jack Lew said:

“These first, targeted steps make substantial progress in constraining the creative techniques used to avoid U.S. taxes.”

He added that these new measure will “no longer make economic sense” for some companies considering inversions.

Obama said in a statement:

“While there’s no substitute for congressional action, my administration will act wherever we can to protect the progress the American people have worked so hard to bring about.”

The changes that the Treasury announced include:

  • Making it more difficult for an American company to seek inversion, as companies will only pay U.S. tax on foreign earnings when brought back to the US.
  • “Hopscotch” loans will now be considered as “U.S. property” and subsequently treated as a taxable dividend.
  • U.S. partners have to own less than 80% of the merged company. The administration wants to reduce that percentage to 50 percent, however, it will require further legislation.
  • The foreign partner’s size can be increased by including its “passive assets”.

There is one exemption to this upcoming proposed rule, as it will not apply to banks and financial service companies.

However, it is key to bear in mind that few analysts expest congress to enact these measures this year, which could result in a lot of US companies undergoing inversion before more restrictions are imposed by the US government.