US launches crackdown on overseas tax avoidance

The Obama administration has begun a crackdown designed to curb tax avoidance by US companies moving to low-tax countries with new rules aimed at stemming the pace of “corporate inversions”.

The changes will likely have implications for Ireland, making it less attractive for American firms considering inversions into Irish companies, a practice that has drawn sharp criticism from president Barack Obama.

For some companies considering inversions, the rules will mean that they “no longer make economic sense,” the US Treasury said.

Bypassing political stalemate on the issue in Congress, the administration issued guidelines to slash benefits for American companies relocating overseas that acquire smaller foreign rivals and use the lower corporate tax rates in the home countries of the new foreign parent companies.

Two months after Mr Obama castigated US firms for “gaming the system” and becoming “magically” Irish by taking over companies in Ireland, his administration is introducing rules that will impose higher taxes on inverting businesses to make the deals less attractive.

The changes, announced by US treasury secretary Jack Lew, will make it more difficult for the inverted company to access money outside the US without paying American corporate taxes.

“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,” Mr Obama said last night.

“I believe that American does better when hard work pays off, responsibility is rewarded and everyone plays by the same set of rules.”

The takeover by Minnesota medical device maker Medtronic of Covidien in Ireland, along with Illinois-based AbbVie's acquisition of British rival Shire in corporate inversions sparked outrage in Washington, stirring economic patriotism as Mr Obama labelled inverted companies "corporate deserters" for moving overseas.

Burger King, the US fast food giant, was recently acquired by Canadian food company Tim Hortons, while pharmacy chain Walgreens abandoned inversion plans following a political outcry.

Congress has been divided over how to tackle the increasing rate of inversions with Republicans wanting limits to be introduced as part of wider reform to reduce the US corporate tax rate of 35 per cent, the highest of any developed country, while more critical Democrats want more sweeping restraints to halt US companies relocating overseas.

“While there’s no substitute for Congressional action, my administration will act whenever we can to protect the progress the American people have worked so hard to bring about,” said Mr Obama.

The rules include a tightening of rules forcing overseas “inverted” companies to pay more US taxes if less than 25 per cent of their business is in the home country of the new parent or if the shareholders of the old US firm own at least 60 per cent of the new foreign parent.

Another measure aims to imposes US taxes on the practice of using “creative” or “hopscotch loans” where companies avoid taxes on dividends by distributing profits through loans to the foreign company.

The regulations will impose US taxes on cash or property moved from an overseas subsidiary to the new foreign parent company. Firms will no longer be able to avoid US taxes on earnings shifted to a foreign subsidiary through a share transaction with the former US parent.

The guidelines are unlikely to end inversions completely because the Obama administration has limited legal ability to block most common inversions. The administration bypassed Congress with its new rules as lawmakers are on recess until after the November 4th midterm elections and unlikely to pass inversion-stemming rules any time soon.