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24 Sep, 2014 01:58

US cracks down on ‘unpatriotic’ corporations’ tax inversion deals

US cracks down on ‘unpatriotic’ corporations’ tax inversion deals

The American corporations labeled unpatriotic for exploiting loopholes to avoid US taxes may see the so-called tax inversion schemes much less lucrative with the new rules announced by the US Treasury to crack down on the practice.

The American corporations labeled unpatriotic for exploiting loopholes to avoid US taxes may see the so-called tax inversion schemes much less lucrative with the new rules announced by the US Treasury to crack down on the practice.

Today, in an important first step, the Treasury is announcing targeted action to meaningfully reduce the economic benefits of corporate inversions, and when possible, stop them altogether,” US Treasury Secretary Jack Lew, said in a statement on Monday.

A number of US corporations were labeled “unpatriotic” for engaging in tax inversion, where an American company buys up a foreign one and then moves their headquarters to the host country to take advantage of the lower corporate tax rates.

America’s corporate tax rate is 35 percent, while countries such as the UK enjoy a rate of 20 percent and Ireland a rate of 12 percent. Lower corporate taxes are believed to be the reason why, earlier this year, Pfizer was trying to buy Britain’s Astra Zeneca and move its headquarters to the UK. The deal fell through because an agreement couldn’t be reached on a price, but estimates are that without rule changes the US could lose $19.5 billion in tax revenue over ten years through inversion, according to the Congressional Joint Committee on Taxation.

Fifty corporations, including Carnival Cruises and Michael Kors, have already taken advantage of the practice, according to the Congressional Research Service. President Obama wanted Congress to act but revising tax laws is a lengthy process, leading the US Treasury to announce a new set of rules to close the loopholes.

This action will significantly diminish the ability of inverted companies to escape US taxation. For some companies considering deals, today’s action will mean that inversions no longer make economic sense,” Lew said.

Three new measures will seek to prevent companies from creating ways to access earnings from a foreign subsidiary without paying US taxes through “hopscotch” loans, in which companies shift earnings by lending money to the new foreign parent company while skipping over the US-based company, according to the Associated Press.

Another rule change would make it harder for merged or acquired companies to benefit from lower foreign taxes by tightening the law over US shareholders that own less than 80 percent of the new combined company.

Inversion transactions erode our corporate tax base, unfairly placing a larger burden on all other taxpayers, including small businesses and hardworking Americans. It is critical that this unfair loophole be closed,” said Lew.

It was the Burger King deal that shook up the Obama Administration and Congress enough to declare that the Whopper-maker’s acquisition of Canadian coffee chain Tim Hortons was unpatriotic. Lawmakers said that while legal, it could threaten the nation’s coffers and was “not right.”

READ MORE: US Senators urge ‘unpatriotic’ Burger King to ditch move to Canada

A group of US Senators led by Democrat Dick Durbin (Ill.) wrote to the company CEO, pointing out how his corporation benefited from taxpayer largesse with its use of roads, food safety inspectors, wage supplements through food stamps, and healthcare through Medicaid – and is now trying to avoid paying its fair share for these benefits.

The new rules however won't stop the companies from closing the deal, Burger King and Tim Hortons wrote in a joint statement to RT.

"We are moving forward as planned. As we've said previously, this deal has always been driven by long-term growth and not by tax benefits," they said.

Today’s actions will make inversions substantially less economically appealing, but as I’ve said, there are limits to what we can do administratively, which is why it is incumbent upon Congress to pass anti-inversion legislation when they return in November,” the US treasury secretary concluded.