Treasury Dept. seeks to prevent more ‘tax-inversion’ deals

The White House and the Treasury Department announced new tax rules that would make “tax-inversion” mergers like the one pending between Burger King Worldwide Inc. and Tim Hortons Inc. more difficult and less appealing. Several companies based in the United States are exploring a tax inversion, or merging with a foreign company and reincorporating the combined entity outside the United States in countries with a lower corporate-tax burden. The Treasury’s new regulations, effective immediately, would limit domestic brands’ ability to shield their earnings from U.S. tax rates by inverting with foreign companies. 1851 Magazine addressed the biggest questions from the government’s announcement: What are the new rules from the Treasury Department? Three key provisions have been identified in Treasury’s new regulations. • So-called “hopscotch loans” will be subject to U.S. taxes. As hopscotch loans are currently practiced, profits earned outside the United States are shifted to the new foreign parent company as a “loan,” in effect skipping over the U.S.-based company. In the future, if a brand in the United States wanted to access that foreign cash, it would have to pay taxes on that transaction at the U.S. corporate-tax rate. • Under current law, U.S. companies are treated as domestic entities, even if they merge and reincorporate with foreign companies, if the former U.S. entity’s shareholders own more than 80 percent of the combined company. The Treasury Department’s rules are designed to discourage ways to reduce American shareholders’ ownership below 80 percent. The regulations limit a company’s ability to spin off business units into a foreign company as well as its ability to reduce its size by paying large special dividends.The Obama administration would like to reduce the ownership threshold to more than 50 percent to still be considered a domestic company. However, to change that level would require legislation, and action from Congress is unlikely. • Other rules would make it more difficult for merged companies to relinquish control of foreign subsidiaries in order to make them exempt from taxes in the United States if foreign profits are repatriated here. When do the rules take effect? The regulations take effect for all transactions from the time of the announcement on Sept. 22. Mergers that might be pending but have not yet closed will be subject to these rules. The Treasury regulations will not be applied retroactively to any tax-inversion transactions that were completed before the Sept. 22 announcement. How does this affect the Burger King-Tim Hortons merger? The Burger King-Tim Hortons deal is one of eight pending transactions in which an American company plans to merge with a foreign company and reincorporate abroad. The deal was announced before the Sept. 22 effective date of Treasury’s new rules, but if the transaction did not close by then, the new Burger King-Tim Hortons combined entity would be subject to the new regulations. Neither Burger King nor Tim Hortons commented Monday. Other U.S.-based companies considering a merger with a foreign entity affected by the new rules include giant pharmaceutical manufacturers Medtronic Inc. and AbbVie Inc. How is this announcement playing out politically? No Republican or Democrat lawmaker has said the Treasury Department’s action would be better than a comprehensive tax reform bill. However, some have described the new regulations as the best the Obama administration can get at the moment with Congress unlikely to take the issue up before midterm elections. “The administration has made a good effort, but administrative action can only go so far,” Sen. Chuck Schumer, D-N.Y., said in a statement. “This rule makes some companies think twice before inverting, but legislation is sorely needed.” Rep. Dave Camp, Republican of Michigan and chair of the House Ways and Means Committee, countered that the Treasury Department’s action was the “bare minimum” the administration could do to address the problem of tax inversions. “Until the White House gets serious about tax reform,” Camp said in a statement, “we are going to keep losing good companies and jobs to countries that have or are actively reforming their tax laws.”