Obama plan to stop tax inversions stirs U.S. business concerns

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Reuters  /  July 13, 2016

The Obama administration's plan to prevent American companies from shifting their headquarters overseas to avoid U.S. taxes is coming under fire from companies and banks that say it would be costly and cumbersome.

At issue are proposed Treasury regulations to combat "earnings stripping," a key goal for companies that carry out tax-avoiding mergers known as "inversions" to reincorporate abroad, if only on paper, to cut their taxes.

The practice effectively shifts taxable earnings from U.S. operations to the redomiciled former American parent as debt interest payments that are tax deductible in the United States and subject to a lower income tax rate overseas.

The Treasury Department is scheduled to hold a public hearing on the proposed changes on Thursday.

The administration's proposals, which could be finalized within months, have already dampened interest in global mergers.

The proposals are backed by Democrats in Congress and academics as a responsible step to prevent corporations from exiting the U.S. tax system. Republicans say the measures overstep administration authority and could discourage foreign investment in the United States.

Businesses and trade groups representing sectors ranging from bankers and retailers to manufacturers and oil producers said a Treasury proposal to end the deductions by reclassifying the debt as equity would disrupt operations and saddle businesses with new red tape.

U.S. multinational Procter & Gamble Co warned Treasury the proposed rules would require countless changes throughout its corporate structure if myriad daily loans between affiliates were recharacterized as equity investments [which they are].

"It will be extremely difficult, if not impossible, to monitor and administer," P&G's Chief Financial Officer Jon Moeller told the Internal Revenue Service in a letter before the regulatory comment period ended last week.

He warned that the company would face pre-tax costs of $220 million to $340 million a year as a result of adverse tax consequences and burdens.

The regulations would also pose challenges for intercompany loans key to the financial services industry, according to Citicorp, JPMorgan Chase & Co and Bank of America Corp, which filed a joint comment with the Treasury.

"A financial services group would face the choice between, on the one hand, staggering administrative complexities and a tax burden disproportionate to its true economic profit, and on the other hand, the imposition of crippling constraints on its ordinary business activities," said the banks, which seek an industry exemption.

A Treasury spokeswoman said officials could respond to the feedback but added the department was moving "swiftly" to finalize regulations.

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U.S. targets corporate tax-reduction strategy with new regulation

Reuters  /  October 13, 2016

The Obama administration, in its latest bid to prevent American companies from minimizing U.S. taxes by rebasing abroad, issued final rules on Thursday to combat a key tax-reduction technique known as earnings stripping.

Six months after proposing the regulations, the U.S. Treasury made good on its pledge to move swiftly against corporate tax inversions by rolling out the new final rule, despite opposition from business groups and from Republicans in Congress who demanded a delay only last week.

"For years, this administration consistently has called for comprehensive business tax reform to fix our broken tax system," Treasury Secretary Jack Lew told reporters. "In the absence of congressional action, however, it is Treasury’s responsibility to use our authority to protect the tax base."

Business lobbyists said the rules would likely be challenged in court.

Tax inversions occur when a U.S. company is acquired by a smaller foreign business from a low-tax country and adopts its domicile to reduce the combined firm's overall U.S. tax burden.

Inversions have occurred since the 1980s, but a new wave in recent years prompted the Treasury to take a series of actions including Thursday's final regulations, which were unveiled in April as part of a package that led to the collapse of a $160 billion merger deal between U.S. drugmaker Pfizer Inc and Ireland's Allergan Plc.

Treasury also imposed a temporary rule in April to prevent foreign companies from engaging in serial inversions. That is expected to be finalized later this year.

Earnings stripping occurs when the U.S. subsidiary of a newly inverted company avoids taxes on domestic operations by sending them overseas as tax-deductable interest payments.

The newly finalized regulations would reclassify some forms of debt as equity, changing tax-exempt interest payments into dividends that are taxed.

Business groups including the U.S. Chamber of Commerce have warned that the regulations could harm the cash management operations of U.S.-based multinationals and pose damaging unintended consequences for a range of businesses by creating mountains of red tape.

But Treasury officials said the final rules addressed those concerns by granting exemptions for regulated financial and insurance firms, cash pooling, short-term debt, transactions between the foreign units of U.S. companies, stock acquisitions for employee compensation plans and other operations.

The regulation also relaxed requirements for companies to document intercompany loans and delayed the documentation deadline for a year to Jan. 1, 2018.

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US modifies plans to crack down on inversions

The Financial Times  /  October 13, 2016

The Obama administration has revised a proposed crackdown on US companies moving overseas to cut their tax bills in an effort to stop other businesses from suffering collateral damage.

Jack Lew, the US Treasury secretary, announced on Thursday that he was modifying the plans designed to deter deals known as inversions, which scuppered Pfizer’s $160bn takeover of Allergan when they were unveiled in April.

The administration had been struggling to stop US companies merging with smaller foreign rivals to shift their domicile to low-tax jurisdictions — often in Europe — and therefore reduce their American tax bills.

The aggressive measures announced in April triggered an outcry from businesses that had nothing to do with inversions and which complained that their ability to manage their finances via internal loans would be impaired.

Mr Lew told reporters on Thursday that the Treasury had been told by companies that its proposals “could unduly constrain ordinary business practices”.

“After carefully considering this feedback, we have addressed stakeholder concerns by more narrowly focusing the final regulations on aggressive tax avoidance tactics and providing certain limited exemptions,” he said.

At issue is the way companies lend money between their subsidiaries using what are known as intra-company loans or related-party debt.

The Treasury wanted to make inversions less profitable by stopping companies from making loans from foreign subsidiaries to the US and deducting the interest payments from their US tax bills, a practice known as earnings stripping.

But American businesses and foreign companies with US subsidiaries said the proposed rules — which restricted the types of financial instruments that could be classified as debt — would interfere with their day-to-day financial management.

One corporate lobbyist recently told the Financial Times that some companies feared that their subsidiaries in emerging markets would have to resort to borrowing from local banks because access to intra-company loans would be cut off.

There were signs that corporate America was not entirely happy with the Treasury’s revisions on Thursday.

The American Chemistry Council, which represents chemical companies, said: “We are deeply concerned by [the] rushed review of Treasury’s debt-equity regulations. The proposed rules touched many segments of the American economy, and we are disappointed that the administration moved too quickly to conduct a meaningful review of the rules’ impacts.”

The Treasury’s revisions include exempting from its crackdown the “cash pools” that companies use to manage cash. It is also exempting transactions where it deems the risk of earnings stripping is low and transactions between banks that use related-party loans in their roles as financial intermediaries.

Kevin Brady, the Republican chairman of the House Ways and Means committee, which oversees tax issues, said: “It appears that the Obama administration has ignored the real concerns of people who will be most impacted by these far-reaching rules.”