Tax Inversion Strategies Now in Doubt

A significant change in the suddenly hot topic that is the tax inversion system will have to come from Congress, but the Obama White House wanted to throw enough doubt into the business community to slow the practice down. The latest rules outlined by the Treasury Department late last month seem to have accomplished this as, within hours of the announcement, shares in several companies started to plummet. Apparently, investors no longer think they will be successful in plans for inversion.

As a reminder, tax inversion is a means for companies to lower their tax bite by buying a foreign rival and moving the combined company headquarters to the country with the lower corporate tax rate. This was a rarely used technique for a long time because it usually meant setting up in a less-developed nation, where the costs of doing business exceeded the savings. With corporate taxes  generally lower in Europe and even Canada, sometimes significantly so, the temptation is greater for US companies.

The part of the inversion process that most irritates its opponents is the ability of a company to loan money to itself and, in the process, avoid taxes on that cash. The foreign HQ would loan money to the US branch and it would not be treated as taxable transfer. That is no longer possible under the new Treasury prohibition. The Treasury rules also close some ownership loopholes that will make inversions more difficult and less lucrative, though they do not ban the practice. Making these moves entirely illegal would depend on Congress, but there are few who think that such a change would make it through both houses anytime soon. 

Those who have already completed their inversion will not be affected by the ruling, as this has not been made retroactive, to the relief to those who recently completed deals. One concern within the international business community is that, because foreign companies with US subsidiaries use a tax technique called “earnings stripping” to lower their US tax bill, there is some fear that Treasury officials will target this next. This might cause many of these foreign operations to rid themselves of US subsidiaries, which could prove costly as far as jobs and investment are concerned.

- Armada Corporate Intelligence

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