US government moves to curb tax inversions

The US Treasury Department announced late Monday that it will take steps to curb corporate tax inversions, a growing tax minimisation strategy that has been the subject of many headlines recently.

In a prepared statement, Treasury Secretary Jacob Lew hailed the move as the first steps in making “substantial progress in constraining the creative techniques used to avoid US taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and when possible, stopping them altogether.”

In a corporate inversion, a multinational company based in the United States will replace its US parent with a foreign parent, thereby potentially avoiding US taxation on some or all of its profits. The actions Treasury announced on Monday are designed to reduce the tax benefits and therefore the incentives for inversions. Treasury’s actions will generally curtail the ability of the inverted company to access the foreign subsidiaries’ overseas earnings without paying US tax; however, the new rules will apply only to deals closed Monday or after.

The Treasury Department announced that it will take action in four specific areas:

First, it will act under Internal Revenue Code Sec. 956(e) to prevent the use of so-called hopscotch loans. Hopscotch loans involve repatriation of foreign earnings by having controlled foreign corporations (CFCs) make loans to their new foreign parent, instead of to the former US parent. In the future, such loans will be considered US property for purposes of the anti-avoidance rule.

Second, Treasury will act under Internal Revenue Code Sec. 7701(l) to prevent a decontrolling strategy in which the new foreign parent buys enough stock in the CFC to take control away from the former US parent, giving the foreign parent access to the deferred earnings of the foreign subsidiary without paying tax. Treasury will treat the new foreign parent, in this situation, as owning stock in the former US parent instead of the CFC.

Third, Treasury will act under Internal Revenue Code Sec. 304(b)(5)(B) to stop inverted companies from transferring cash or property from a CFC to the new foreign parent, avoiding US tax.

Finally, Treasury will act under Internal Revenue Code Sec. 7874 to strengthen the requirement that former owners of the US entity own less than 80% of the new combined entity. These steps will include limiting the ability of companies to count passive assets that would inflate the new foreign parent’s size; preventing US companies from making extraordinary dividends to reduce their pre-inversion size; and stopping “spinversions,” in which a US entity transfers assets to a new foreign entity that it spins off to its shareholders.

—Alistair M. Nevius (anevius@aicpa.org) is CGMA Magazine’s editor-in-chief, tax.