Treasury to crack down on tax loophole for firms
Lew: New rules will fix ‘glaring loophole’
New rules target companies that try to avoid taxes by moving headquarters overseas.
The Treasury Department will crack down on socalled tax “inversions,” targeting companies that try to avoid taxes by moving their headquarters overseas.
Treasury Secretary Jack Lew said the new rules would help close what he called a “glaring loophole in the U.S. tax code” in which U.S. companies acquire foreign businesses and then switch their citizenship to avoid paying U.S. taxes.
One rule, for example, would make it more difficult for U.S. companies to invert through mergers with smaller foreign companies. The administration wants to strengthen a requirement that the former U.S. company’s shareholders own less than 80% of the combined company to avoid being treated as a U.S. company for tax purposes. When the shareholders of the former American company own more than 60% but less than 80% of the new company — as most recent inversion deals have called for — the merger would be allowed but with significant tax consequences.
Another rule would target socalled “hopscotch” loans, in which companies get around taxes on dividends by instead distributing their earnings in the form of a loan to the foreign company. Those would now be taxable in the United States.
The Treasury is still fleshing out the details on the new guidance, but it is putting companies on notice that deals that close on or after Monday’s announcement will be subject to the new tax rules.
“For some companies considering deals, today’s actions may mean that those transactions no longer make economic sense,” Lew said. He said more actions could be on the way.
Lew said the Treasury Department was also careful to target cases where the mergers were primarily for tax avoidance: “Genuine cross-border mergers make the U.S. economy stronger by enabling U.S. companies to invest overseas and encouraging foreign investment to flow into the United States.”
Inversions aren’t a new problem, but a number of high-profile deals have rekindled interest in the issue. Burger King is in talks to be acquired by Canadian company Tim Hortons, and an outcry over a similar plan by drugstore chain Walgreens caused that company to abandon its inversion plans.
One prominent Republican said the rules show the Obama administration “is only interested in doing the bare minimum — just enough to say they care.”