The US Treasury has watered down regulations designed to address corporate tax inversions, adopting a narrower approach after businesses launch a strong protest against its original plans, but says this will still limit the ability of companies to lower their tax bills through transactions involving debt that do not support new investment in the US
The US introduced more comprehensive anti-tax inversion rules in April as a temporary measure, following widespread public concern about Pfizer’s plans to takeover Dublin-based Allergan and move its headquarters outside the US in what was viewed as an attempt to reduce its corporate tax bill.
Jacob Lew, Treasury secretary, said: ‘This administration has long called for legislative action to fix our broken tax system. We have taken a series of actions to make it harder for large foreign multinational companies to avoid paying US taxes and reduce the incentives for US companies to shift income and operations overseas. Such tax avoidance practices are wrong and should be stopped.’
However, the final regulations now being introduced are more narrowly defined than the temporary rules and will focus on addressing earnings stripping, which Lew said was a commonly used technique to minimise taxes after an inversion.
‘Throughout our rulemaking process, we sought comments to help narrow the rule and avoid any unintended consequences. We engaged extensively with businesses, tax experts, the public, and lawmakers and carefully considered their comments and recommendations. As a result of this process, the final rule effectively addresses stakeholder concerns by more narrowly focusing the regulations on aggressive tax avoidance tactics and providing certain limited exemptions,’ he said.
The Treasury said the final regulations narrowly target ‘problematic’ earnings stripping transactions, but are designed to minimise unintended consequences. Cash pool and short-term loans are now exempt, as are transactions between foreign subsidiaries of US multinationals and transactions between pass-through businesses. Financial institutions and insurance companies that are subject to regulatory oversight regarding their capital structure are also excluded from certain aspects of the rules.
The Treasury has significantly expanded the exceptions for distributions to generally include all future earnings and allowing corporations to net distributions against capital contributions. It is also including additional exceptions for ordinary course transactions, such as acquisitions of stock associated with employee compensation plans.
In addition, the Treasury has relaxed the intercompany loan documentation rules for US borrowers and the deadline for providing documentation has been extended by one year until January 1, 2018.
Lew said: ‘Coupled with our previous actions to address corporate inversions, these changes balance the operational needs of companies while preventing the erosion of our US corporate tax base’
‘Nonetheless we cannot fully solve problems like inversions and earnings stripping through administrative action alone. The real solution is for Congress to enact comprehensive business tax reform with specific anti-inversion and earnings stripping provisions.’
Lew said that while action on tax inversion was an important step, there needed to be a wholesale reform of the US business tax system. ‘There is a growing bipartisan consensus about the urgent need to act. Recent developments, such as the European Commission’s state aid investigations, have brought additional attention to the issue,’ he said.
