September 29, 2014

U.S. Treasury Department Inversion Policy Would Make Tax Code More Complex

As promised by Treasury Secretary Jack Lew and President Barack Obama, the U.S. Treasury Department last week issued a new executive branch policy aimed at stopping U.S. corporations from moving their headquarters overseas. The rules, which The Washington Post explains would not block corporate inversions, but could make them less profitable, were more aggressive than expected and, according to several analysts, might actually slow the progress toward comprehensive tax reform. In a fact sheet, the Treasury Department outlined several specific actions it would take, including actions to:

  • Prevent inverted companies from accessing a foreign subsidiary’s earnings while deferring U.S. tax through the use of creative loans;
  • Prevent inverted companies from restructuring a foreign subsidiary in order to access the subsidiary’s earnings tax-free;
  • Close a loophole to prevent inverted companies from transferring cash or property from a controlled-foreign corporation (CFC) to the new parent;
  • 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 by:
    • Limiting the ability of companies to count passive assets not part of the entity’s daily business functions;
    • Preventing U.S. companies from reducing their size pre-inversion by making extraordinary dividends; and
    • Preventing 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.

Reuters reports the Treasury Department’s new regulations had an immediate effect on the share prices of some U.S. companies, but will do little to stem inversionsAs Connecting the Dots has previously reported, federal lawmakers have offered legislation to ban inversions, but it is extremely unlikely Congress will take up that legislation during a post-election legislative session in November and December. However, the Treasury Department indicated in its statement last week that it is considering additional measures to prevent inversions. Stay tuned to Connecting the Dots for more on this issue. MSCI also encourages its members to read this blog from the National Association of Manufacturers to find out how concerns about corporate inversions are best handled through comprehensive tax reform and this editorial from The Wall Street Journal that explains how an anti-inversion policy would make the U.S. tax code more complex.