With the US Congress unable to agree on measures to prevent US companies bailing out of the US tax system by becoming Irish, British or Dutch, often as brass-plate operations, the Obama administration on Monday announced new rules to combat what are known as tax inversions.
The takeover of foreign companies for tax purposes began in the 1980s and in 2004 Congress required the inverted company to have more than 20% foreign ownership but it did not prove to be a disincentive -- the acquired foreign company was often effectively an American firm with a brass-plate headquarters address overseas.
The number have accelerated in recent years and the plans of Pfizer, the drugs giant, to become "British" via the acquisition of rival Astra Zeneca renewed attention to the tax dodge this year.
The Financial Times say that thirteen inversion deals have been announced since the start of 2013 - - including Burger King’s $11.4bn acquisition of the Canadian coffee shop chain Tim Hortons - - and are together worth $178bn, according to Dealogic.
The Treasury Department had expected a further thirty this year.
The tax changes took effect immediately and applied to all deals that hadn't closed by Monday which means the planned move by Medtronic, the medical devices firm, to become "Irish" have likely been scuppered.
It may also upend the merger of banana firm Chiquita Brands International and Ireland's Fyffes plc; AbbVie’s $52bn bid for Shire, the British drugs firm that moved its headquarters to Dublin in 2009, may also be in peril.
The new rules include a prohibition on loans that enable companies access foreign cash without paying US taxes, and impose new curbs on actions that companies can use to make such transactions qualify for favourable tax treatment - - for example, the changes ban the use of certain assets to inflate the size of the foreign merger partner. They also prohibit US companies from paying special dividends just before an inversion in order to reduce their own size, or spinning off part of their operations to shareholders for the same reason.
“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,” President Obama said in a statement. “I’m glad that Secretary Lew is exploring additional actions to help reverse this trend.”
US Treasury fact sheet
This is good news for Ireland as these companies have been distorting the national accounts while bringing little economic benefit.
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“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,” said Jacob Lew, US Treasury secretary. “While comprehensive business tax reform that includes specific anti-inversion provisions is the best way to address the recent surge of inversions, we cannot wait to address this problem. Treasury will continue to review a broad range of authorities for further anti-inversion measures as part of our continued work to close loopholes that allow some taxpayers to avoid paying their fair share.
"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. 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.
"Specifically, today’s action eliminates certain techniques inverted companies currently use to gain tax-free access to the deferred earnings of a foreign subsidiary, significantly diminishing the ability of inverted companies to escape US taxation. It also makes it more difficult for US entities to invert by strengthening the requirement that the former owners of the US company own less than 80 percent of the new combined entity. For some companies considering mergers, today’s action will mean that inversions no longer make economic sense."
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