Companies that seek to avoid US tax by shifting their headquarters abroad are being targeted under tough new rules announced by the Obama administration that it claims will dramatically reduce the benefits of so-called corporate inversions.
The controversial technique, which has allowed companies such as Burger King to move abroad by buying a smaller foreign rival, had become a major test of White House resolve in the face of a failure to agree a legislation solution in Congress.
But after several weeks examining legal options for unilateral executive action, Treasury officials say that a series of changes to their “administrative guidance” will suffice to stamp out much of the practice in future.
“It’s critical that this unfair loophole is closed,” Treasury secretary Jack Lew told reporters.
He said the series of measures would “significantly limit companies’ ability” to carry out inversions in future by making them “substantially less economically appealing”.
Specifically, companies will no longer be able to escape tax on their US earnings by using internal loans, dividends and share swaps to restructure themselves under foreign ownership.
Though the changes will not apply to existing deals such as Burger King, they will serve as deterrent to others.
The pharmaceutical giant Pfizer had been considering moving its headquarters to Britain under a deal to buy the smaller UK rival Astra-Zeneca, but dropped the plan after a storm of political controversy on both sides of the Atlantic.
Similarly Walgreens, the drug store chain, dropped a plan to relocate its head office to Europe, as part of a broader deal to acquire the remaining shares it did not own in UK partner Alliance Boots.
Both deals may have also been deterred by sharp criticism from the White House and Democrats in the Senate, but the failure to pass binding legislation before Congress broke for the summer meant that Wall Street dealmakers were left with an opportunity to call Obama’s bluff. The subsequent deal between Burger King and smaller Canadian target Tim Hortons in August left the White House with an important political test ahead of this November’s midterm election to show that its policy of taking executive action where necessary still had real teeth.
A Treasury official said some of the measures may also help close tax loopholes used by other multinationals who are not moving their headquarters.
“These first, targeted steps make 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,” added Lew in a statement.
“While comprehensive business tax reform that includes specific anti-inversion provisions is the best way to address the recent surge of inversions, we cannot wait to address this problem. The Treasury will continue to review a broad range of authorities for further anti-inversion measures as part of our continued work to close loopholes that allow some taxpayers to avoid paying their fair share.”
The Treasury insisted that transactions for “genuine corporate benefit” would still be allowed under the rule.
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