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US Treasury Cracks Down On Tax Inversions
One of the key drivers of the recent spike in M&A deals (and sellside advisory fees) has been the surge in tax inversion transactions, deals in which a U.S. company reincorporates for tax purposes in a tax-friendlier country such as the U.K. or Ireland, while maintaining its real headquarters in the U.S. Traditionally such deals have involved a merger between a U.S. firm and a smaller foreign firm. The reason for such deals is simple: to lower the corporate tax payments by avoiding the venue of the one country with the highest corporate tax rate in the world: USA, and leave more cash available for distribution to private shareholders. And since every such deal lowers the cumulative tax that the US collects from corporations, Obama, helpless to change the legislation that ushered in these deals in the first place, came out a few months ago, with a heartfelt appeal to corporate patriotism, calling inversions "wrong", and demanding "corporate patriotism." He failed. Which is why moments ago the Treasury released its new rules meant to "Reduce Tax Benefits of Corporate Inversions."
Per the US Treasury: "Today, Treasury is taking action to reduce the tax benefits of — and when possible, stop — corporate tax inversions. This action will significantly diminish the ability of inverted companies to escape U.S. taxation. For some companies considering mergers, today’s action will mean that inversions no longer make economic sense."
As the WSJ explains, in a multipronged attack, the administration took action under five separate sections of the tax code to make so-called inversions harder to accomplish and less profitable.
Three of the moves are aimed at blocking inverted companies from using techniques—sometimes known as "hopscotching"—to get access to their offshore cash without paying U.S. tax on it. Those would apply to deals closed on or after Sept. 22.
Another move makes it more difficult for U.S. firms to skirt current ownership standards in inverting. Still another move would make it harder for U.S. firms to spin off subsidiaries overseas.
Taken together, the administration's moves are likely to remove at least some of the economic appeal of inversions, which have become more common in recent years, particularly in the pharmaceutical industry. Noticeably absent, however, was a much-discussed idea to limit inverted companies' ability to ship U.S. profits overseas tax free.
Will it work? Hardly. After all it is the same corporations that have lobbied their favorite puppet politicians over the years that made inversions possible in the first place, and absent a change in the law it is difficult to see what authority the US Treasury has to make up rules on the fly. The WSJ agrees: "some experts have questioned how much authority the Treasury Department actually has in the area, and legal challenges to Monday's actions remain a possibility. The moves also seem unlikely to end inversions altogether, as even Treasury Secretary Jacob Lew has recently conceded, in part because the administration has little legal ability to block the most common type of inversion." Just in case there was any doubt who really calls the shots in the America...
Nonetheless, the inversion free for all is now likely over: "Monday's announcement was likely to chill many deals, at least for now. The Treasury Department also promised to continue looking for other regulatory steps to discourage inversions, and to review tax treaties."
Yet to think: the US government would have spared itself so much jawboning effort and fake work if all the Treasury did was promise that the 10 largest shareholders of the "unpatriotic inversion offender" would get the "tea party" treatment by the IRS. Then watch as inversions end with a thud, never to be heard of again.
And should the US government be taken to task for yet another despotic, "executive action" tactic, well, there are so many backupless hard disks in the US government that can and will fail at just the right time, that one is assured no trace of any decision process will ever exist.
* * *
Below is the fact sheet on the specific actions the Treasury will take starting today:
Today, Treasury is taking action to reduce the tax benefits of — and when possible, stop — corporate tax inversions. This action will significantly diminish the ability of inverted companies to escape U.S. taxation. For some companies considering mergers, today’s action will mean that inversions no longer make economic sense.
Specifically, the Notice eliminates certain techniques inverted companies currently use to access the overseas earnings of foreign subsidiaries of the U.S. company that inverts without paying U.S. tax. Today’s actions apply to deals closed today or after today.
This notice is an important initial step in addressing inversions. Treasury will continue to examine ways to reduce the tax benefits of inversions, including through additional regulatory guidance as well as by reviewing our tax treaties and other international commitments. Today’s Notice requests comments on additional ways that Treasury can make inversion deals less economically appealing.
Specifically, today’s Notice will:
Prevent inverted companies from accessing a foreign subsidiary’s earnings while deferring U.S. tax through the use of creative loans, which are known as “hopscotch” loans(Action under section 956(e) of the code)
- Under current law, U.S. multinationals owe U.S. tax on the profits of their controlled foreign corporations (CFCs) although they don’t usually have to pay this tax until those profits are repatriated (that is, paid to the U.S. parent firm as a dividend). Profits that have not yet been repatriated are known as deferred earnings.
- Under current law, if a CFC, tries to avoid this dividend tax by investing in certain U.S. property—such as by making a loan to, or investing in stock of its U.S. parent or one of its domestic affiliates—the U.S. parent is treated as if it received a taxable dividend from the CFC.
- However, some inverted companies get around this rule by having the CFC make the loan to the new foreign parent, instead of its U.S. parent. This “hopscotch” loan is not currently considered U.S. property and is therefore not taxed as a dividend.
- Today’s notice removes benefits of these “hopscotch” loans by providing that such loans are considered “U.S. property” for purposes of applying the anti-avoidance rule. The same dividend rules will now apply as if the CFC had made a loan to the U.S. parent prior to the inversion.
Prevent inverted companies from restructuring a foreign subsidiary in order to access the subsidiary’s earnings tax-free (Action under section 7701(l) of the tax code)
- After an inversion, some U.S. multinationals avoid ever paying U.S. tax on the deferred earnings of their CFC by having the new foreign parent buy enough stock to take control of the CFC away from the former U.S. parent. This “de-controlling” strategy is used to allow the new foreign parent to access the deferred earnings of the CFC without ever paying U.S. tax on them.
- Under today’s notice, the new foreign parent would be treated as owning stock in the former U.S. parent, rather than the CFC, to remove the benefits of the “de-controlling” strategy. The CFC would remain a CFC and would continue to be subject to U.S. tax on its profits and deferred earnings.
Close a loophole to prevent an inverted companies from transferring cash or property from a CFC to the new parent to completely avoid U.S. tax (Action under section 304(b)(5)(B) of the code)
- These transactions involve the new foreign parent selling its stock in the former U.S. parent to a CFC with deferred earnings in exchange for cash or property of the CFC, effectively resulting in a tax-free repatriation of cash or property bypassing the U.S. parent. Today’s action would eliminate the ability to use this strategy.
Make it more difficult for U.S. entities to invert by strengthening the requirement that the former owners of the U.S. entity own less than 80 percent of the new combined entity:
- Limit the ability of companies to count passive assets that are not part of the entity’s daily business functions in order to inflate the new foreign parent’s size and therefore evade the 80 percent rule – known as using a “cash box. (Action under section 7874 of the code) Companies can successfully invert when the U.S. entity has, for example, a value of 79 percent, and the foreign “acquirer” has a value of 21 percent of the combined entity. However in some inversion transactions, the foreign acquirer’s size is inflated by passive assets, also known as “cash boxes,” such as cash or marketable securities. These assets are not used by the entity for daily business functions. Today’s notice would disregard stock of the foreign parent that is attributable to passive assets in the context of this 80 percent requirement. This would apply if at least 50 percent of the foreign corporation’s assets are passive. Banks and other financial services companies would be exempted.
- Prevent U.S. companies from reducing their size pre-inversion by making extraordinary dividends. (Action under section 7874 of the code) In some instances, a U.S. entity may pay out large dividends pre-inversion to reduce its size and meet the 80 percent threshold, also known as “skinny-down” dividends. Today’s notice would disregard these pre-inversion extraordinary dividends for purposes of the ownership requirement, thereby raising the U.S. entity’s ownership, possibly above the 80 percent threshold.
- Prevent a U.S. entity from inverting a portion of its operations by transferring assets to a newly formed foreign corporation that it spins off to its shareholders, thereby avoiding the associated U.S. tax liabilities, a practice known as “spinversion.” (Action under section 7874 of the code) In some cases a U.S. entity may invert a portion of its operations by transferring a portion of its assets to a newly formed foreign corporation and then spinning-off that corporation to its public shareholders. This transaction takes advantage of a rule that was intended to permit purely internal restructurings by multinationals. Under today’s action, the spun-off foreign corporation would not benefit from these internal restructuring rules with the result that the spun off company would be treated as a domestic corporation, eliminating the use of this technique for these transactions.
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how about plugging the tax loop holes first assholes. Is GE still getting tax refunds
Blah blah blah......
There is nothing to prevent any Company from re-incorporating offshore in a tax haven, leaving behind a US subsidiary which would alone be responsible for US taxes. However, with Transfer pricing (Roayalties, Trademark/IP Agreements, Licensing Fees etc.) most US profits could be siphned offshore. Expect to see this happening more until the structural problems with the US tax code are addressed.
So real tax code reform will never happen until the collapse is over?
Don't charge Hank Paulson capital gains for his Goldman Sachs stock liquidation prior to becoming treasury secretary, but go after everyone else. Fuck this government all to hell. Collapse can't come soon enough.
Gee, I wonder how Buffett knew this was coming on the BK/Tim Hortons deal (or was he just "lucky")?
Free Tim Hortons!
Last one out, turn off the lights... Watch for a stampede of US based multinational companies to bolt for the door...
"So real tax code reform will never happen until the collapse is over?"
Yup. Now, Mr Chairwoman, get back to work.......
CBS reporter wonders if Biden is better-protected than Obama:
http://tinyurl.com/kremltl
I know very little about corporate tax and inversions. Can someone tell me if this is a form of capital controls?
Yes.
Buffett seems to own the Capitol and the White House. How could he be controlled?
CCanuck - fwiw, being no expert either, I think its like Pfiser buying Glaxo to become a UK company and avoid some US tax. What interests me here is that they're trying to get more tax out of corporations...
Tyler, I like this phrase - Tea Party Tax Treatment. Stories like the Jack Ma neurotic guy as the model for how to live and be, convey that the opposite, being poor, or even just not wealthy is The American Hell. Lois Lehrner is there and UNTOUCHABLE to keep the threat alive and thereby keep the well-conditioned American, who see a threat to their stuff as a mortal wound, managed. This is what we used to call cowardice.
They want you to believe that you have no intrinsic worth outside of your collection of stuff and electronic blips their bank is keeping track of for you.
That's not a loophole; that's an accomodation-bought and paid for.
how about just passing the HR25 legislation to end the corporate tax altogether? it just gets passed on to us, the individual taxpayer, in the end anyway.
That used to be my sentiment, but I've changed the way I think about it. I disagree with most things the govt does, and I think the more money left in the hands of private individuals, the better. I know it sucks paying your taxes and watching these assholes get away with all these loopholes, but that money is not better off with the govt. We should be demanding an end to the fed and the IRS instead. My problem is that these people exist on corporate welfare , not that they aren't giving the govt enough money. By responding in this manner, we are playing right into the govts hands by demanding people give them more money. I don't work for one of these companies or anything like that, I have no dog in this fight, in just in favor of anything that keeps money out of the govts hands.
The taxes are not very low, but anyone who wants to buy a bearing company in Peru (um, you would have to overpay) would then be free to set up shop as a Peruvian company.
Take that, fishez!
I thought you went into commentary retirement?
Welcome back.
Thank you, yes I did ask the Tylers to remove my account (by the politest email ever), I am confident that they will eventually... Until then I will plug my blog (http://goo.gl/NRc3dg) when I write something, and green arrow any great comments from friends! Oh, look! You have a green!
I will refrain from critiquing Putler (etc.). Who needs it? Not me, not ZH.
moved
Greetings, DCRB.
No matter whether we've agreed or disagreed, I've always considered you a fair and decent person, and I'm glad to see you're doing OK.
Don't be a stranger. ;)
We are broke so for the foreseeable future we will be making up the rules as we go
more bullshit....
drink up.
Headline:
"Government Decides It's Probably Going to Go Ahead and Take More Stuff"
Crack down? Thats a good laugh. These guys are literally decades behind on this issue.
Funny thing is that even if they were to crack down, the US tax code is still written by a battalion of lawyers at GE. Strict enforcement would probably boost their non-taxable profits.
now do you understand why there is no difference between the red pill and the blue pill?
BRILLIANT! BKC'll pay Tim Horton's to make the bid instead.
Give it a break LEW, you will never win against Goldman.
Remains to be seen if this is what starts some type of "cascading effect." Clearly "not all Pyramid schemes are created equal."
The best thing to do is to start shutting them all down. IMMEDIATELY.
What is known of them (as per Albania) is that they all have a shelf life.
If we're talking Exxon/Mobil that shelf life could be quite long. (1000 years?)
Argentina in addition to Canada both have "infinity energy." The robots of Manhattan have responded accordingly...
Don't be so sure, they have already decorated his future office
Lew was an investment banker for citi and he invested in funds to profit off the housing collapse. He's not trying to beat the squid, he's building his resume.
Duly noted, thank you all for your insight. FWIW I think Tim Horton would be perfectly happy to stay a bachelor in Canada.
Quite an impressive business, all I knew is Wendy threw him out....LOL.
Political theater (a comedy in fact) - since when does Treasury 'make' laws? And if they enforce laws that Congress passed - then why didn't they enforce them before?
Yes. But this is an inviolable law of a particular type of scam. "There is an absolute end date." Charles Plosser knows this now and has handed off "Philadelphia" (that would be the entire City and metropolis) to "Comcast Corporation" to "run."
Interesting story of an armed robbery up my way involving fatalities. "They were from Philly."
Endorsed by former PA GOV? YES
why is laissez-faire a term if no one will practice it?
There must be an "election" coming up or something, because there is a lot moar meaningless rhetoric come out of Washington.
They don't want to close post offices either.
This is sure to kick the economy into gear.
"The more you tighten your grip Lord Lew, the more corporations are going to slip through your fingers."
Get this, what if... just stay with me for one minute . . . what if say 30,000,000 people signed up online to form our own citizens agency, with the goal in mind of . . . taxing the govt, with a "Peoples Tax Bill", we can base the tax on the revenue the government generates from taxes.... like an INCOME TAX.
"We the people, hold the U.S. govt liable for Income tax on ALL income from all sources to a rate of 45%"
Its perfect and down-right ingenious , and if enough people sign up, its going to be more legitimate than the IRS anyway! so why the hell not?
The 45% of our own money that we get back from the government could go to funding schools, public works projects and providing aid and relief to lower income families, and maybe even spill over and actually get the Great Wall of America between us and Mexico built.
Say they collect on average a few trillion a year, 30~45% of that put to ACTUAL USE here in America would DO WONDERS! ^^ and it wouldn't go to waste like when the govt gets to spend it....
Think about it, are you as a legally interested party not entitled to a portion of the revenue that your country rakes in? and it works out great, because then this becomes taxable income on your end, so the govt gets back 40% of the 40% (and so on and so-forth) so just think about all the jobs we will create for people to sit there and calculate the cash flowing back and forth pointlessly? ^^ . . .
Congress makes tax law Lewsky, not you and the klack you run with. Smok'em if you have 'em.
makes me laugh...tax inversions exist because of regulatory arbitrage between countries. what would make a US company locate to a country with a lower tax rate? and why wouldn't a non-US company want to trade here from a low tax rate country?
over egg it, make it complicated, hire loads of tax lawyers because...... one country tries to rob peter to pay paul. in other words, inversion is a symptom of differential tax rates beyond the "menu" costs of switching to another country.
ask why the states of New York, Florida and Texas want to give companies state tax breaks for ten years, funding it from companies that are already there and don't qualify, or why NY, Fla and Tx aren't seeking to impoverish other US states by taking away their factories and research facilities? is that not tax inversion?
just because ireland offers a 10% corporate tax rate and lots of american companies move there, does not make ireland anything other than a thief. same as it ever was and happens in offshore banking units, countries like luxembourg, liechtenstein, channel islands, bermuda, vanuatu, etc etc etc
you can extend the wilful thievery of these kinds of regulatory arbitrage into wages. chinese, indian, roumanian, vietnamese, brazilian companies could not compete as well without using labor at 50 cents an hour instead of 30 bucks an hour whilst at the same time forcing 14 hour days, no medical or holidays or pensions. is this any more of an inversion?
both labor inversions and company inversions are the result of punitive tax rates needed to pay debts for profligate fiscal positions accumulated over many years.
there is a middle road, but locking in companies because they are needed to pay for the corruption that is consecutive fiscal deficits is akin to saying "we have been fucking up for decades and you aren't going anywhere as we want to keep on fucking up for decades to come"
education has inversions, health care, even holidays are based on inversions. the treasury action assumes that it can keep injecting maggots into the apple and no-one will notice.
if american companies cant compete on a level footing with non-US companies, why is the solution to lock the "losing ground" issue in?
I do believe that charity starts at home, but I also believe that if soemthing is broken you fix it; you don't break something else to make it balance out for the next few days.
jack lew and the rest of the statist morons bending over backwards to solve a problem they created in the first place by insisting on having an asinine tax law should seppuku themselves immediately.
barry is such an unpredictable and useless fuck
hope he gets clipped in November
"Unpredictable" isn't exactly the description I'd use.
If anything, he is predictably traitorous.
wow that was close for Buffett, or did he give Lew an all clear call.
GE the biggest recipient of govt. give-aways by far, this is why MSNBC, and CNBC can operate with little to no viewers, their lost leaders for GE, and govt. financed.
Statutory theft = unauthorized encumberance of someone else's property. It literally is a crime.
Throw the traitor a dollar. He'll bend over.
Make it more difficult for U.S. entities.... bingo. And therefore run even more businesses out of the U.S.
Backward thinking jackwipes.
"Backward thinking" Well, that depends on what your goal is, doesn't it?
I'm sure there will be no selective enforcement on this one.
It's so much easier to let the bureaucracies write their own laws, not having to go through Congress and all.
Translation: You companies need to each pay a politician individually if you want a tax break.
Right
Instead of changing the tax code to benefit all, we'll change a few laws to punish those that think they can avoid our reach.
Creating laws where there are none by people who are not elected and answerable to no one but Emperor Obama himself.
Just run this nation into the ground...let's go ahead and get it over.
It's not like we had a real recovery anyway.
Too Bad they weren't as concerned when said corporations off shored the nations production.
Clearly, what is needed is more government regulation. Clearly.
Because this is how actual tax law is made. It's just some asshole at the treasury or IRS making it up as they go along. No one agrees. No one votes. No debate. They just do.
Honest accounting? Not in a million years...they are all dead.
Muppet; Here is one, Fascist Asswipe. Maybe ZH Turned the Political Tide here. Go Get your ass Fucked. oops, I meant go suck your dick again. And wipe that shit off your face.
So... our government is building a Berlin wall around our economy, not to keep bad guys out, but to keep businesses in. Just like communist countries that so mistreat their people they need to build walls to keep them in. Of course, a wall to keep those who seek escape, is proof positive of a total failure of the economic policies of government.
What a pathetic reflection on the caliber of our leaders.
Yes!
Like it would have been in an old movie called "Escape from East Germany!" We see it in this inversion nonsense. We see it in "obamacare". We see it in Social Security and more.
Try to escape the system our dear leaders have set up (...for our own good, of course...) and you'll wind up like the young woman laying on the barbed wire with a bullet in her back. What a country this has become!
Hmmm a bunch of politicians who are barely literate vs extremely high paid and high skilled corporate lawyers. I wonder which group will be able to outsmart the other.
"The United States operates a Marxist taxation and I am not thinking of Karl Marx but on Groucho Marx," says Ernesto Zedillo at a conference in Copenhagen.
I did corporate tax returns for 3 years - mind numbing boredom - rules on top or rules on top of exceptions with exceptions and more rules.
If you want unfair laws - make them so complicated that even if you read them carefully you still are not sure exactly what is allowed and what is not.
So that 2 professional people can read the same statute and come up with two different opinions - both of which can be correct.
Corporation taxes and payroll taxes in the supply chain inflate the costs of goods and services and are a discreet means to funnel huge amounts of consumers' money to the government without appearing to do so. These taxes are politically so important to retain that governments will do anything to continue with the charade. Admitting that consumers actually bear all the costs of the state, at the same rate whether they are rich or poor, and thus that "progressive" taxation is a fraud would be politically unthinkable. Ending these taxes and boosting sales taxes correspondingly would solve the problem and demonstrate a willingness of government to tell the truth about taxation once and for all, and accept that public spending could not run unchecked anymore.
The entire tax industry could then find more valuable work in the economy. Commerce and enterprise would undoubtedly soar.