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US Treasury, IRS Issue Further Anti-Inversion Notice

by Mike Godfrey, Tax-News.com, Washington

20 November 2015


On November 19, US Treasury Secretary Jack Lew presented further non-legislative rules that largely build on the measures put forward by the Obama Administration in September last year to deter US multinationals from using corporate inversions to move their tax residences abroad.

The proposed measures, which apply to deals closed on or after November 19, are contained in Notice 2015-79, "Additional Rules Regarding Inversions and Related Transactions," issued by the Internal Revenue Service (IRS) and Treasury.

In announcing the measures, Lew said: "Last year, Treasury took targeted action to address inversions. This notice made a real difference by reducing some of the economic benefits of inversions, resulting in a decline in the pace of these transactions. This next action makes it even harder to invert, and further reduces the tax benefits for US companies."

Specifically, the actions being taken make it more difficult for US companies to undertake a corporate inversion by (1) limiting the ability of US companies to combine with foreign entities using a new foreign parent located in a "third country," (2) limiting the ability of US companies to inflate the new foreign parent corporation's size and therefore avoid the 80-percent ownership rule, and (3) requiring the new foreign parent to be a tax resident of the country where the foreign parent is created or organized.

The third requirement will need to be met in order to satisfy the current rule that at least 25 percent of the new entity's business activity is in the home country of the new foreign parent.

The notice also reduces the tax benefits of inversions by limiting the ability of an inverted company to transfer its foreign operations to the new foreign parent after an inversion transaction without paying current US tax. These actions apply to inversions completed on or after September 22, 2014, the date of the previous Treasury/IRS Notice.

Lastly, Lew disclosed that, while "these actions further reduce the benefits of an inversion and make these transactions even more difficult to achieve, … it is not the end of our work. We continue to explore additional ways to address inversions - including potential guidance on earnings stripping - and we intend to take further action in the coming months."

He also noted that, in the Administration's view, "there is only so much Treasury can do to prevent these tax-avoidance transactions. We look forward to continuing to work with Congress in a bipartisan manner to reform our broken business tax system and to eliminate inversions for good."

Following the announcement of the new rules, House of Representatives Ways and Means Committee Ranking Member Sander Levin (D – Michigan) pushed for passage of the bill already before Congress, which includes a stipulation that foreign company shareholders would have to own 50 percent of a new combined operation, rather than the current 20 percent.

Others called for comprehensive tax reform. The Senate Finance Committee Ranking Member Ron Wyden (D – Oregon) called inversions "a red flag on the urgent need for tax reform," with the Committee's Chairman Orrin Hatch (R – Utah) adding that "the best way to resolve these issues would be through a comprehensive tax overhaul that lowers the corporate tax rate and shifts the US to a territorial tax system with base erosion protections."

Summing up his view, Ways and Means Chairman Kevin Brady (R – Texas) stated: "Mandating new rules to raise taxes on American businesses simply make them more attractive takeover targets for foreign corporations. Treasury is contradicting its own call to pursue a more competitive tax code in favor of shortsighted counterproductive triage which will only lock American businesses in an even more uncompetitive tax system. Instead, we should all redouble our efforts to work together to fix our broken tax code."

TAGS: compliance | tax | business | tax compliance | law | mergers and acquisitions (M&A) | corporation tax | Internal Revenue Service (IRS) | ministry of finance | tax authority | multinationals | transfer pricing | United States | tax breaks | tax reform | regulation

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