US clamps down on corporate tax move

The US treasury has clamped down again on so-called corporate inversions in an attempt to stop American companies switching their on-paper headquarters to low-tax countries such as Ireland.

The rules were unveiled as US pharmaceutical giant Pfizer looks to acquire Dublin-based Allergan in a $150 billion (€141 billion) deal that would be the biggest corporate inversion to date and lead to the New York-based firm availing of Ireland's lower 12.5 per cent corporate tax rate.

Ireland is a popular destination for acquisition targets, as US companies can avoid paying the higher rate of 35 per cent.

"US companies are currently taking advantage of an environment that allows them to move their tax residence overseas to avoid paying taxes in the US, without making significant changes in the nature of their overall operations," said treasury secretary Jack Lew.

“It’s the treasury’s responsibility to protect the US tax base. We have repeatedly stated that we will use all of our existing administrative authority to address inversions.”

The rules curtail tax advantages that come with the merger of two companies by establishing a domicile in a third country.

Merged entity

Under existing rules, if shareholders of the US company seeking to acquire an overseas entity still own 80 per cent or more in the merged entity, the treasury treats the enlarged firm as a US company for tax purposes, regardless of where the new company’s headquarters are.

New restrictions aim to stop a technique called “stuffing” where the non-US company is made artificially larger before a merger to meet the 80 per cent threshold rule. Another restriction requires the new foreign parent company to be tax-resident in the country where it was created and organised.

As Republicans and Democrats try to find agreement on how to reform the complex US tax code to curb inversions, the US administration started introducing restrictions to prevent the practice, though it has said legislation is required to stamp it out completely.

"The fact that American companies, including Pfizer, continue to pursue inversions makes clear that additional steps are needed to stop this trend," said US congressman Sander Levin.