The Treasury Department announced new rules, effective
immediately, that will reduce the tax benefits available to
companies that have inverted, while also making new inversions more
difficult to do and less potentially rewarding.
Because they took effect on Monday, the new rules might raise issues
for some of a handful of companies that have agreed to do
inversions, but have not yet completed them.
Fast-food chain Burger King Worldwide Inc <BKW.N> is in the midst of
inverting to Canada in a deal with coffee-and-donuts vendor Tim
Hortons Inc <THI.TO>. A spokeswoman for Burger King said the company
declined to comment.
Asked about the impact on pending deals, a senior Treasury official
told reporters on a conference call: "If they are closed and done as
of today, then they are not subject to this. If they are closed
tomorrow or after, they are subject to this."
President Barack Obama, who has sharply criticized inverting
companies, said the Treasury Department's steps would "discourage
companies from taking advantage of corporate inversions – moving
their tax residence overseas on paper to avoid paying their fair
share in taxes here at home."
The announcement of the rules followed months of growing concern on
Capitol Hill, with Democrats urging prompt legislative action and
Republicans pushing to address the problem later, perhaps in 2015,
as part of a broader overhaul of the loophole-riddled federal tax
Companies that do inversions, which are legal and already subject to
certain restrictions, say they are only trying to minimize their tax
bills, which investors expect.
About 50 such deals have taken place since the early 1980s, but half
of those have been completed just since the 2008-2009 credit crisis,
according to a Reuters review.
MEDTRONIC DEAL PENDING
Inversions have surged in the past year, pursued by big companies
such as Burger King and medical technology group Medtronic Inc
<MDT.N>, which is working to close an inversion deal into Ireland
with rival Covidien Plc <COV.N>.
Medtronic spokesman Fernando Vivanco late on Monday told Reuters:
"We are studying Treasury’s actions. We will release our perspective
on any potential impact on our pending acquisition of Covidien
following our complete review."
Medtronic has said it expects to close the Covidien acquisition by
the end of this year or early 2015.
Inversions usually involve a U.S. corporation buying a smaller,
foreign rival and redomiciling in its home country, where taxes are
lower, even though core operations typically remain in the United
(Graphic on corporate inversions: http://reut.rs/1tWc9p7)
Treasury Secretary Lew said in a statement: “These first, targeted
steps make substantial progress in constraining the creative
techniques used to avoid U.S. taxes, both in terms of meaningfully
reducing the economic benefits of inversions after the fact, and
when possible, stopping them altogether.”
A key target of Treasury's actions is foreign profits held offshore
by U.S. multinationals under a U.S. Internal Revenue Service (IRS)
rule that defers taxation on such profits unless and until they are
brought into the United States.
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One new Treasury rule will prevent inverted companies from using
"hopscotch" loans that allow them to avoid dividend taxes when
tapping such tax-deferred foreign profits. Another rule will bar
inverters from gaining access to the same kinds of profits by using
"decontrolling" strategies that restructure foreign units so they
are no longer U.S.-controlled.
Treasury is also tightening limits on the levels of ownership that
the former U.S. owners can have in an inverted company to qualify
for foreign tax treatment from the IRS, a move that will make it
harder to do these deals.
Some companies had feared that new rules might be imposed
retroactively, but they were not.
Greg Valliere, chief political strategist at Potomac Research Group,
said the administration "may succeed in chilling the climate for
further deals, but this was not as strident as it could have been,
especially in that they don’t do anything retroactively.”
The rules were the administration's latest effort to tackle what it
sees as a pressing issue by taking executive actions that side-step
a gridlocked Congress.
“When corporations choose to invert and don’t pay their fair share
of taxes, they leave the rest of us to pick up the tab," said
Democratic Senator Dick Durbin in a statement.
“Today, the Obama administration put these corporate tax deserters
on notice: we are not going to stand by while they game the tax code
and avoid their responsibility to our country," Durbin said.
Though in disagreement about the issue's urgency, both Democrats and
Republicans have said inversions are a symptom of a broken tax code
that needs a thorough overhaul, a job that has eluded Congress and
successive presidents since 1986.
Senator Orrin Hatch, the top Republican on the tax law-writing
Senate Finance Committee, said in a statement: "In the end, any
solution that permanently addresses inversions must be legislated by
(Additional reporting by Emily Stephenson in Washington, Lisa
Baertlein in Los Angeles, Susan Leach in Chicago, Bill Berkrot and
Jeffrey Dastin in New York, Bernie Woodall in Detroit; Editing by
Diane Craft, Steve Orlofsky, Andre Grenon and Lisa Shumaker)
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