The Treasury Department and the Internal Revenue Service on Thursday issued new rules aimed at discouraging American companies from moving their headquarters abroad in search of lower tax rates.þþIncreasingly, American companies have been trying to reduce their tax liabilities through a tactic known as a corporate inversion — buying smaller foreign competitors and using those purchases to move their headquarters to countries with more favorable tax rates than the United States’.þþThe new measures will make that more difficult by curtailing companies’ ability to avoid United States tax rates if they move to locations where they lack substantial business activity.þþYet one of the potential targets of the Treasury Department’s actions, the giant pharmaceutical company Pfizer, is already weighing ways to bypass the rules governing inversions as it seeks to buy a fellow drug maker, Allergan, which is based in Ireland, for about $150 billion.þþPfizer and Allergan products include Advil, Lipitor, Viagra and Botox.þþPfizer and Allergan Said to Be Near Merger for Up to $150 BillionNOV. 18, 2015 þþ“Treasury cannot stop inversions without new statutory authority,” Treasury Secretary Jacob J. Lew, center, wrote in a letter to the Senate about the strategy some companies have used to move their headquarters to lower-tax nations overseas by way of a corporate merger.þþTreasury Plans Additional Rules to Deter InversionsNOV. 18, 2015 þþ þAmong the strategies it is discussing is structuring the potential transaction so that Allergan would technically be the buyer, according to a person briefed on the matter who spoke on the condition of anonymity. Because Allergan’s headquarters are already in Ireland — even though much of its operation is based in New Jersey — the arrangement could allow the deal to avoid being deemed an inversion.þþYet in reality, Pfizer, with a market value of about $205 billion, would still effectively be buying its counterpart, which has a capitalization of about $124 billion. Its shareholders would own more than 55 percent of the combined company, and Allergan’s shareholders would receive a premium for their holdings, the person added.þþA deal could be reached in a little over a week, the person said, cautioning that talks are continuing and may still fall apart.þþRepresentatives for Pfizer and Allergan declined to comment.þþReaction to the rules, which were released late in the afternoon, was muted. Stephen E. Shay, a senior lecturer at Harvard Law School, said they were weaker than many people expected. “It’s not going to do anything to affect in any meaningful way the largest deal that is in front of them,” he said.þþLaurence M. Bambino, the head of the global tax group at the law firm Shearman & Sterling, said: “It’s another misguided attempt by Treasury to box in U.S. corporations to the benefit of non-U.S. corporations.”þþTreasury officials said on Thursday that they were not targeting any particular deal and added that the rules only went so far in curbing tax-avoidance transactions. Real changes, they said, would have to come from Congress in the form of legislation.þþ“Treasury cannot stop inversions without the implementation of new legislation by Congress, which we view as unlikely over the near term,” Liav Abraham, an analyst with Citigroup, said on Wednesday, before the rules were released.þþThe Obama administration has previously pledged to curtail inversions, though companies continue to try them. For example, Coca-Cola Enterprises, a bottler and distributor based in Atlanta, plans to combine with two European Coke bottlers to form a new British-based company. Also, CF Industries, an Illinois-based fertilizer company, is forming a new British company with a Dutch company. þþTreasury Secretary Jacob J. Lew has called on Congress to act.þþ“While we intend to take additional action in the coming months, there is only so much the Treasury Department can do to prevent these tax-avoidance transactions,” he said in a statement on Thursday. “Only legislation can decisively stop inversions.”þþAt a news conference announcing the rules, Mr. Lew said that Treasury officials were working “to eliminate inversions for good.”þþA senior Treasury official speaking on background said one measure that forbids a combined company from moving to a new, third headquarters would address the largest abusive component of the inversion tactic. American companies would no longer be allowed just to shop for the lowest-tax location for a new headquarters regardless of whether the combined company had any business there.þþThe senior Treasury official said officials had been working on the rules for several months and that more would be coming.þþOrrin G. Hatch, the Utah Republican who leads the Senate Finance Committee, said on Thursday in response to the Treasury’s proposals, “A pure anti-inversion approach may have the unintended consequence of encouraging more acquisitions of United States companies by foreign-owned firms. With the American tax system already favoring foreign takeovers, we need to chart a course that tips the balance away from inversions and foreign takeovers.”þþHe and other lawmakers called for legislative action.þþSander Levin, a Michigan Democrat and ranking member of the House Ways and Means Committee, said, “The rumors that Pfizer may announce its plans to invert as soon as next week, making it potentially the largest inversion ever, highlights the urgent need for Congress to act, in addition to steps taken by Treasury.”þþInversions have been around for a long time, but a big wave of them in the last two years has caused concern in Washington.þþLast year the Treasury Department proposed to make it harder for companies to use cash accumulated overseas without paying taxes in the United States on it, reducing the economic incentives of an inversion. Treasury has yet to issue formal regulations, but said it would do so in the coming months.þþIt also said it was continuing to examine a tactic known as “earnings stripping,” in which a company creates tax deductions in higher-tax locations and income in lower-tax locations by making intercompany loans. The interest is tax-deductible for the United States operations and the income is taxed at the lower rate in the foreign operations.þþExisting rules on earnings stripping have been on the books for years but they give companies wide latitude, said Robert Willens, a tax consultant. As long as the interest expense isn’t greater than half a company’s earnings before taxes, interest, depreciation and amortization, it is allowed, he said. “Most companies are still able to do it.”þþA group of Democratic lawmakers introduced legislation in January to tighten restrictions on corporate tax inversions, which they said would save $34 billion in tax revenue. But it has not gone beyond being introducedþ
Source: NY Times
