U.S. toughens rules to discourage tax inversions

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The U.S. strengthened efforts to discourage corporate inversions by making the deals more difficult and limiting the benefits of transactions in which American companies take foreign addresses to cut their tax liabilities.

Some of the actions announced Thursday by the Treasury Department will impact transactions that close today or after, whereas others apply retroactively to those completed after September 2014.

Corporate inversions — deals where U.S. companies take foreign addresses and cut their tax rates — became a political flash point last year, though the rhetoric has since cooled. The latest possible transaction is Pfizer Inc.’s potential $150 billion acquisition of Allergan Plc, which would be the drug industry’s biggest deal ever.

“These actions further reduce the benefits of an inversion and make these transactions even more difficult to achieve,” Treasury Secretary Jacob J. Lew said on a conference call with reporters Thursday. “This is an important step, but it is not the end of our work. We continue to explore additional ways to address inversions — including potential guidance on earnings stripping — and we intend to take further action in the coming months.”

The Treasury said it’s reducing the tax benefits of inversions by limiting the ability of an inverted company to transfer its foreign operations to the new foreign parent without paying U.S. tax, according to a statement released in Washington. These actions apply to inversions completed on or after Sept. 22, 2014, the department said.

The department also sought to stop inversions in which a U.S. company buys a smaller foreign company and then uses the transaction to establish a new tax address for the combined firm in a third country. The department expects the biggest impact on inversions will come from that change, as some companies set up a unit in a third country without any real connection to the transaction, a Treasury official told reporters on the call.

Becoming Irish

For example, Endo International Plc, a drugmaker run from Pennsylvania, was once a U.S. company that became Irish for tax purposes by buying a smaller Canadian competitor. The Treasury rules “will prevent U.S. firms from essentially cherry-picking a tax-friendly country in which to locate their tax residence,” Treasury said in a statement.

Currently, U.S. companies are allowed to do inversions if at least 25 percent of the new company’s business is done in the foreign country in which the new firm was created or organized. The new rules will discourage inversions by also requiring that the new company be a tax resident of the foreign country in which it was created or organized, the Treasury said.

Tax inversions have been criticized by U.S. lawmakers and presidential candidates. Last year the Treasury Department issued a proposal intended to discourage the moves, which typically only change a company’s legal address while the operating headquarters stays in the U.S. Allergan, for example, is run from New Jersey and has a Dublin tax address.

“We welcome efforts from Treasury to curb overseas tax inversions,” Oregon Senator Ron Wyden, the ranking Democrat on the Finance Committee, said in a statement. “Ultimately it’s up to Congress to deliver tax policy that better equips companies to compete and succeed by staying in the U.S. And the only way to get that done, and end the inversion virus that is plaguing our country, is through true bipartisan tax reform.”