The United States Treasury Department issued new rules Monday that it calls the “first, targeted steps” toward solving the problem of corporate tax inversion deals, an issue that has plagued Washington politics over the past year and one matter that U.S. officials say is hurting the government and taxpayers.
Treasury Secretary Jack Lew released the rules that he believes will make it a lot more difficult for companies to lessen their tax burdens by merging with foreign businesses and establishing shop in overseas territory. The Obama administration has been warning for months that it was going to take action if Congress did not because these inversions are “unpatriotic.”
Lew unveiled tax guidance that will govern any type of inversion completed from Sept. 22 onward. Also, the Treasury put forward at least one strict regulation that will seriously affect inverted companies by making it harder to avoid paying U.S. taxes on foreign earnings they have already garnered.
Previously, companies have been required to pay U.S. tax on their foreign earnings when they bring revenues back to the U.S., but inverted companies could evade this by having a foreign subsidiary make a so-called “hopscotch” loan to the new foreign parent instead of the American company. However, the federal government will treat these types of loans as U.S. property and identify this money as a taxable dividend.
Moving forward, inverted companies will notice how tricky it will be to use cash accumulating abroad.
“This action will significantly diminish the ability of inverted companies to escape U.S. taxation,” Lew told reporters on a conference call Monday. “For some companies considering deals, today’s action will mean that inversions no longer make economic sense.”
Lawmakers respond
Oregon Democratic Senator and Senate Finance Committee Chairman Ron Wyden celebrated the move by averring that it reiterates how important it is to enforce policies that can help prevent these inversions. Also, he vowed that he’ll still attempt to put forward legislation that prohibits the practice.
Others weren’t so quick to be jubilant. Michigan Republican Congressman and House Ways and Means Committee Chairman David Camp was critical of the measures in a statement, but he refrained from suggesting the administration should back away from the new regulations.
“A few campaign style speeches and stopgap measures from Treasury won’t do it,” he said. “It hasn’t worked in the past.”
Although Congress has submitted legislation to curb inversions, most experts concur that it’s unlikely Washington will pass or enact these measures prior to the mid-term elections in November. Business tax reform isn’ts expected to be on the agenda until the middle of next year.
Companies hurting in the market
When it comes to inversions, healthcare and pharmaceutical companies are the biggest beneficiaries.
It may come as no surprise then that drug firms were pummeled in the U.S. and foreign stock markets Monday and Tuesday. Shire was down six percent in London because its planned merger with AbbVie is now being threatened and the ladder may call off the much touted $55 billion deal.
Medical technology maker Smith & Nephew experienced a 3.5 percent decline.
Mylan and Abbot Laboratories are expected to fall off significantly during the Tuesday trading session.
