WASHINGTON, D.C.: The US Treasury took action on Monday (Tuesday in Manila) to halt a rising torrent of US companies moving offshore to cut their tax bills, saying the surge in so-called inversions threatened government income.
The move to close loopholes that encourage US companies to merge with a foreign firms and relocate their tax residences offshore could stifle takeovers announced this year worth hundreds of billion of dollars.
Those include several high-profile medical industry deals, including AbbVie’s $55 billion purchase of Shire and Medtronic’s $43 billion merger with Covidien, as well as Burger King’s$11 billion tie-up with Tim Hortons, and Chiquita Banana’s proposed $1 billion merger with rival Fyffes.
The Treasury said it was moving after Congress failed to act on the issue.
“We cannot wait to address this problem,” said Treasury Secretary Jacob Lew.
“These first, targeted steps make substantial progress in constraining the creative techniques used to avoid US taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and, when possible, stopping them altogether.”
The measures take aim particularly at expectations that a company, after an inversion, would be able to take advantage of earnings accumulated and held by the US partner offshore without ever paying taxes on it.
Currently many US companies retain substantial foreign earnings offshore to avoid taxes they would have to pay upon repatriating them into the United States.
Inversion deals, with the US company redomiciling itself to the home of the other partner in the deal, ostensibly allowed the new “foreign” firm to take control of those earnings and use them, even in the United States, without paying taxes on them.
But Lew said that advantage will be blocked by the new rules. The new foreign parent of the company will be deemed as owning shares in the former US parent, making it liable for taxes on the old offshore earnings.
Other parts of the inversion strategy, involving loans between the partners in the new company, and asset transfers, will also not bring any tax advantages to the new company.
“Genuine cross-border mergers make the US economy stronger by enabling US companies to invest overseas and encouraging foreign investment to flow into the United States,” the Treasury said.
“But these transactions should be driven by genuine business strategies and economic efficiencies, not a desire to shift the tax residence of the parent entity to a low-tax jurisdiction simply to avoid US taxes.”
The surge in inversions, more than $200 billion worth this year according to the Wall Street Journal, had given rise to a scare over possible job losses, loss of US control of technologies, and, in particular, an erosion of the US tax base.
It also provoked fears of tax competition by jurisdictions, countries cutting their rates specifically to attract companies, just as leading economies are struggling to balance their budgets by boosting income.
Earlier this year, President Barack Obama branded companies pursuing inversions as unpatriotic, benefitting from the US economic environment but avoiding the taxes that pay for it.
“They are technically renouncing their US citizenship . . . You know some people are calling these companies ‘corporate deserters,” he said in July.
Obama applauded the Treasury’s move.
“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,” he said in a statement.
“And I’m glad that Secretary Lew is exploring additional actions to help reverse this trend,” he said in a statement.