US modifies plans to crack down on inversions
Final regulations will be focused more on aggressive tax avoidance tactics after business outcry
The Obama administration has revised a proposed crackdown on US companies moving overseas to cut their tax bills in an effort to stop other businesses from suffering collateral damage.
Jack Lew, the US Treasury secretary, announced on Thursday that he was modifying the plans designed to deter deals known as inversions, which scuppered Pfizer’s $160bn takeover of Allergan when they were unveiled in April.
The administration had been struggling to stop US companies merging with smaller foreign rivals to shift their domicile to low-tax jurisdictions — often in Europe — and therefore reduce their American tax bills.
The aggressive measures announced in April triggered an outcry from businesses that had nothing to do with inversions and which complained that their ability to manage their finances via internal loans would be impaired.
Mr Lew told reporters on Thursday that the Treasury had been told by companies that its proposals “could unduly constrain ordinary business practices”.
“After carefully considering this feedback, we have addressed stakeholder concerns by more narrowly focusing the final regulations on aggressive tax avoidance tactics and providing certain limited exemptions,” he said.
At issue is the way companies lend money between their subsidiaries using what are known as intra-company loans or related-party debt.
The Treasury wanted to make inversions less profitable by stopping companies from making loans from foreign subsidiaries to the US and deducting the interest payments from their US tax bills, a practice known as earnings stripping.
But American businesses and foreign companies with US subsidiaries said the proposed rules — which restricted the types of financial instruments that could be classified as debt — would interfere with their day-to-day financial management.
One corporate lobbyist recently told the Financial Times that some companies feared that their subsidiaries in emerging markets would have to resort to borrowing from local banks because access to intra-company loans would be cut off.
There were signs that corporate America was not entirely happy with the Treasury’s revisions on Thursday.
The American Chemistry Council, which represents chemical companies, said: “We are deeply concerned by [the] rushed review of Treasury’s debt-equity regulations. The proposed rules touched many segments of the American economy, and we are disappointed that the administration moved too quickly to conduct a meaningful review of the rules’ impacts.”
The Treasury’s revisions include exempting from its crackdown the “cash pools” that companies use to manage cash. It is also exempting transactions where it deems the risk of earnings stripping is low and transactions between banks that use related-party loans in their roles as financial intermediaries.
Kevin Brady, the Republican chairman of the House Ways and Means committee, which oversees tax issues, said: “It appears that the Obama administration has ignored the real concerns of people who will be most impacted by these far-reaching rules.”