The Obama administration took a big regulatory step on Monday in making it harder for American companies to avoid U.S. taxes by moving overseas. The technique, known as “inversion,” is when “a U.S.-based multinational restructures so that the U.S. parent is replaced by a foreign corporation, in order to avoid U.S. taxes,” the Department of Treasury said in a statement. Corporate inversions have drawn headlines recently as major companies like Burger King and Medtronic Inc. employed the strategy.
Though the Treasury can’t unilaterally change U.S. tax code -- Congress must vote on such changes -- it can enact regulatory changes that close loopholes in the system and make corporate inversions less beneficial in the first place.
In what U.S. Treasury Secretary Jacob Lew called “first, targeted steps,” the Treasury Department’s new rules include regulations that will reduce the tax benefits to companies that move their headquarters abroad. The Treasury will also require more stringent ownership criteria, making it tougher for American companies to move overseas in the first place. "This action will significantly diminish the ability of inverted companies to escape U.S. taxation," Lew said.
Another rule is aimed at so-called “hopscotch” loans that allow companies to circumvent taxes on dividends by distributing earnings in the form of a loan to the foreign company. These loans will now be taxable in the United States.
The new rules are not retroactive, but will be applied to any deals going forward. "For some companies considering deals, today's actions may mean that those transactions no longer make economic sense," said Lew. The Treasury Department is also reviewing other regulatory measures to close loopholes.
“While there’s no substitute for Congressional action, my administration will act wherever we can to protect the progress the American people have worked so hard to bring about,” President Obama said in a statement issued by the White House on Monday.
“Secretary Lew briefed me today on the first steps the Treasury Department is taking to 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. 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, and I’m glad that Secretary Lew is exploring additional actions to help reverse this trend.”