The Obama administration on Monday announced moves to curb so-called tax inversions, the manoeuvre by which companies either acquire rivals or merge with them to relocate their headquarters to a foreign country with lower corporate tax rates.
The Treasury Department is attempting to limit inversions through two main methods, senior administration officials said Monday — making inversions substantially less economically rewarding, and moving to prevent inversions from going forward in the first place.
To make inversions less economically appealing, here are the changes the Treasury Department is making:
• Preventing inverted companies from restructuring a foreign subsidiary in order to access the subsidiary’s earnings tax-free. This action, under Section 7701 of the tax code, will treat a new foreign parent company as owning stock in the former U.S. parent, rather than the controlled foreign corporation (CFC). It would limit the benefits of the so-called “de-controlling” strategy, by which a new foreign parent could access the deferred earnings of the CFC without ever paying taxes on them.
• Preventing “hopscotch” loans. The administration has moved to reduce the benefits of these loans, by which companies avoid taxes on profits of their CFCs by having the CFC make a loan to the new foreign parent, instead of the U.S. parent.
And here’s how the Obama administration is moving to prevent inversions from the start:
• Closing an important loophole. This action is taken under a subsection of Section 304 of the U.S. tax code. It will, officials said, prevent an inverted company from transferring cash or property from a CFC to the new parent to completely avoid U.S. tax.
• Strengthening the requirement that former owners of the U.S. entity own less than 80% of the new, combined entity. Under current law, companies can engage in an inversion as long as the U.S. company has a 79% stake in the new entity and the foreign acquirer has at least a 21% stake in the new, combined entity.
This action, under Section 7874 of the tax code, would limit the ability of companies to count so-called “passive assets” toward the 80% rule; prevent U.S. companies from reducing their size through dividends; and block so-called “spinversions,” a method by which companies transfer a portion of its assets to a newly formed corporation and then spinning off that corporation to shareholders. Under current law, it allows the companies to avoid U.S. taxes.
On a conference call with reporters Monday evening, Treasury Secretary Jack Lew said the administration was taking executive action since it had become clear Congress would not address the issue this year. He said the steps would make companies “think twice” about the manoeuvre.
“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,” President Barack Obama said in a statement.
The new regulations will go into effect immediately, senior administration officials said Monday. Lew said on the call that they are aimed at reducing the benefits of and, “when possible,” stopping inversions.
NOW WATCH: Briefing videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.