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 For months, Treasury has offered no fresh guidance on the inversion
issue, leaving tax experts to speculate about what could come next.
Inversions typically involve a U.S. multinational buying a smaller
foreign rival and relocating to its home country, if only on paper,
to escape U.S. taxation.
Allergan shares fell 2.3 percent on Thursday afternoon amid reports
that Treasury might move to block its deal with Pfizer.
Possible steps the government might take include tightening the
rules on two strategies related to inversions, tax experts said:
"earnings stripping" and "skinny down" distributions.
Treasury took several actions in September 2014 to reduce the tax
benefits available to companies that have inverted, while also
making new inversions more difficult to do and less potentially
rewarding. The moves stemmed a wave of inversions, but not before
Minnesota medical technology group Medtronic <MDT.N> reincorporated
in Ireland.
At the time, Treasury and the Internal Revenue Service said they
were weighing further actions. On Friday, a Treasury spokeswoman
offered more of the same language.
"The Treasury Department and the IRS expect to issue additional
guidance to further limit inversion transactions," said the
statement from late last year.
That guidance said Treasury was looking at ways "to address
strategies that avoid U.S. tax on U.S. operations by shifting or
'stripping' U.S.-source earnings to lower-tax jurisdictions,
including through intercompany debt."
Because U.S. corporations don't disclose what they pay in income
taxes, it's hard to estimate how much revenue has been lost to
inversions or could be lost in the future. A congressional committee
estimated in May 2014 that legislation then being debated to largely
slam the door on inversions would raise almost $20 billion from 2015
through 2024. That legislation was never adopted.
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Tighter earnings-stripping rules would curtail a key attraction of
inversions, but Treasury has struggled to write such a rule within
the constraints of present law, experts said. Fresh legislation from
Congress on inversions, despite occasional rhetoric to the contrary
from lawmakers on Capitol Hill, is regarded as unlikely before the
2016 elections.
"The rhetoric is heating up over Pfizer, but I don't see anything
immediate on the horizon," said Edmund Outslay, a tax accounting
professor at Michigan State University. Nor, he said, did he expect
Treasury to act on its own.
Corporate tax law consultant Robert Willens said a tighter earnings
stripping rule from Treasury was unlikely without action from
Congress. But, he said, Treasury could harden its existing rule on
"skinny down" restructuring strategies meant to circumvent existing
inversion rules.
No two inversions are identical, but the goal is usually for a U.S.
company to do just enough to satisfy Treasury and IRS requirements
for treatment as a foreign entity, while avoiding the actual
transfer abroad of core management and research.
To be recognized as a foreign entity under U.S. law, one key hurdle
is to ensure that the original U.S. shareholders own less than 60
percent of the combined company. One way to do that is through
"skinny down" share buybacks or other distributions that shrink the
size of the U.S. company going into the inversion. Treasury likely
could tighten that rule, perhaps by extending the time limit on
covered transactions, without accompanying legislation from
Congress, experts said. "I think that's where they'll focus their
attention," Willens said.
(Editing by John Pickering)
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