Treasury revises rules on corporate inversions

When the U.S. Treasury Department recently revised regulations pertaining to corporate inversions, the New York State Society of Certified Public Accountants applauded.

Just over a month ago, the group had fired back at President Barack Obama after the president blamed the accounting industry for the much-debated practice, in which an American company reincorporates overseas to escape paying corporate taxes to the federal government. Now, the group”™s president, Scott Adair, says the blame is focused where it should be.

“The New York State Society of CPAs is pleased the Obama Administration has stopped blaming accountants for corporate tax inversions and is rightly placing the responsibility for them with the people who actually determine what is written in the U.S. tax code: members of Congress,” Adair said in a statement on the group”™s website.

The new rules, released last week, make it more difficult for inverted corporations to access a foreign subsidiary”™s earnings tax-free through “hopscotch loans,” when a foreign corporation controlled by an inverted U.S. company makes a loan of its profits to the new foreign parent ”” thus escaping U.S. tax liability because the profit was technically not property of the U.S. company. Hopscotch loans now will be considered U.S. property to disincentivize their use.

Companies also will no longer be allowed to restructure foreign subsidiaries to access the subsidiaries”™ earnings tax-free, and the rules close a loophole that allowed cash or property transfers from foreign subsidiaries to the new inverted parent corporation to avoid U.S. taxes.

The recently revised rules are expected to slow inversion transactions, but they won”™t stop them.

“It”™s an interim, middle-of-the-road solution,” said Phillip G. Cohen, a professor in the Legal Studies and Taxation Department of Pace University”™s Lubin School of Business and a retired vice president for tax and general tax counsel for Unilever United States Inc. “I think it should adversely affect some inverted corporations, the secretary of the treasury will treat loans and other inbound transactions to foreign subsidiaries as if they were to the American corporation. This will have an effect of stopping companies from tapping into foreign earnings.”

In remarks announcing the reinterpreted rules, Treasury Secretary Jacob J. Lew said the rules aren”™t the ideal solution.

“Comprehensive business tax reform that includes specific anti-inversion provisions is the best way to address these transactions,” Lew said. “While that work continues, I have been urging Congress to pass anti-inversion legislation, which is the only way to close the door on these transactions entirely.”

Corporate inversions are legal and codified in the federal tax code. While a foreign corporation is still required to pay U.S. taxes on income derived from American sources, income earned abroad is beyond the reach of the IRS. Thus, American corporations that earn significant income outside of the U.S. can decrease their tax liabilities by inverting.

Legislation has been introduced to close the corporate inversion loophole. The Stop Corporate Inversions Act of 2014, which broadly follows the proposal laid out by the president in his fiscal year 2015 budget, was introduced by a dozen House Democrats. Sen. Carl Levin, a Democrat from Michigan, introduced similar legislation in the Senate.

“We need to reform our tax system so that working families and small businesses, who are already paying much more than their fair share, are not forced to make up for special interests credits and loopholes that benefit only the largest corporations,” said U.S. Rep. Nita Lowey, a Democrat representing Rockland County and part of Westchester, and a co-sponsor of the bill.

Currently, Section 7874 of the tax code prohibits U.S. companies from reincorporating overseas through an inversion unless stakeholders of the foreign company maintain more than 20 percent of the combined foreign corporation. The Stop Corporate Inversions Act would change the threshold so the stakeholders of the foreign company must maintain at least 50 percent of the combined foreign corporation. The bill also would prohibit U.S. companies from reincorporating overseas through an inversion if the affiliated group that includes the combined foreign entity is managed and controlled in the U.S. and conducts significant domestic business activities in the U.S.

The bill was referred to the Ways and Means Committee in the House of Representatives and the Finance Committee in the Senate, but has gained no further consideration.

The controversy over inversion transactions came to the forefront as major American corporations including Walgreens, Mylan, Medtronic and Burger King have sought to ship their headquarters overseas to reduce their federal corporate tax liabilities and increase profits for shareholders.