US in sweeping tax inversions crackdown
The Obama administration has issued sweeping rules to crack down on companies that use deals to move their headquarters overseas in tax-driven manoeuvres known as inversions. Democrats have become increasingly hostile to US companies that merge with rivals from countries with a lower tax rate to reduce their domestic tax bill and put their non-US earnings beyond the reach of US authorities. "We’re taking initial steps that we believe will make companies think twice" before carrying out an inversion, said US Treasury secretary Jack Lew. "For some companies considering deals, today’s actions will mean that inversions no longer make economic sense." Under rules announced by the Treasury on Monday, it will be harder for US companies to meet the requirements for an inversion and harder for those companies that invert to access their overseas cash piles without paying US taxes when they move cash between foreign countries. Thirteen inversion deals have been announced since the start of 2013 – including Burger King’s $11.4bn acquisition of the Canadian coffee shop chain Tim Hortons – and are together worth $178bn, according to Dealogic. The Obama administration resorted to using its executive powers to curb inversions as Democrats and Republicans in Congress cannot agree on how to tackle them via legislation. The new rules will stop non-US subsidiaries of inverted companies from making loans to their new foreign parent as a way to avoid paying US tax. They will also stop the new parents from buying overseas subsidiaries to free that cash from US tax. The Treasury is also making it harder for a US company to meet the current rules for inversion, which require shareholders of the foreign partner to own more than 20 per cent of the new company. For example, the changes ban the use of certain assets to inflate the size of the foreign merger partner. They also stop US companies from paying special dividends just before an inversion in order to reduce their own size, or spinning off part of their operations to shareholders for the same reason. The restrictions will impose a significant barrier to tax-driven deals where US companies buy foreign rivals, such as AbbVie’s $52bn bid for Ireland’s Shire this year. Concern about intervention to stem the tide of inversions has weighed on healthcare stocks, after a spate of inversions-driven deals in the sector. Most of the changes will not affect deals that have already closed before they were announced. The Treasury warned that it would continue to look for other steps to discourage inversions, and to review tax treaties. "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 Secretary Lew is exploring additional actions to help reverse this trend," said President Barack Obama in a statement. The rules remove some but not all of the tax advantages of an inversion. Charles Schumer, the Democratic senator for New York, welcomed the changes but said that only legislation would stop the practice. "It’s clear that without legislation that stops earnings stripping and defines an inversion more tightly, this egregious abuse is likely to continue," he said. Many on Wall Street believe the attack on inversions – and the rhetoric deployed – is a cynical attempt by Washington to avoid addressing the issue of reforming a US tax code that, they argue, makes it hard for its companies to compete globally. "What we are watching here is tough rhetoric and a clear intention to change market behaviour in a place where they arguably lack legal authority," said a senior Wall Street adviser. The move provoked further disagreement with the Republican party over the issue of tax reform. "Under President Obama, the United States has the highest corporate tax rate in the developed world," said a spokesman for John Boehner, Republican speaker of the House of Representatives. "The answer is to simplify and reform our broken tax code to bring jobs home – and help grow our economy and create even more American jobs."