White House moves to limit corporate offshore tax moves

The Obama administration announced on Monday that it will use its regulatory authority to crack down on tax inversions, the maneuver used by Burger King and other companies to cut their tax bills by moving their tax home outside the United States.

“We’ve recently seen a few large corporations announce plans to exploit this loophole, undercutting businesses that act responsibly and leaving the middle class to pay the bill, and I’m glad that [Treasury] Secretary [Jack] Lew is exploring additional actions to help reverse this trend,” President Barack Obama said in a statement.

It’s the latest bid by the White House to make policy on issues it says Congress cannot agree on, and comes amid a summer of companies mulling the moves offshore. It drew immediate criticism from Republicans.

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Both Lew and Obama have said that they would prefer to see Congress take action to prevent inversions, but lawmakers have been deadlocked. Most Republicans have argued that a tax code overhaul is the only way to prevent companies from moving abroad, while Democrats would prefer to do something to address inversions, nothing that tax reform is a ways off.

Speaker John Boehner and top House tax writer Dave Camp (R-Mich.) blasted the move on Monday.

“A few campaign-style speeches and stopgap measures from Treasury won’t do it — it hasn’t worked in the past, and even Secretary Lew admits the only real solution is tax reform,” Camp said.

The issue of inversions picked up over the summer with bids by the drug giant Pfizer and drug store chain Walgreens to invert. A recent Congressional Research Service report found that 47 U.S. corporations moved their tax base overseas through an inversion in the past 10 years. A total of 75 inversions have occurred since 1994.

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The actions announced Monday fall into two broad categories — those that make existing inversions less lucrative and those that make future moves more difficult to engineer.

The first provision aimed at making inversions less appealing would prevent companies from using what Treasury called “creative” loans to move profits among overseas subsidiaries to avoid paying taxes on dividend payments. The so-called hopscotch loans allow the controlled foreign corporation that owes dividends to make a loan to the new foreign “parent” company to avoid U.S. taxation.

The new Treasury rules would consider value of the loans taxable as U.S. property and apply dividend rules to loans made to the U.S. parent company before the inversion.

Current rules allow the foreign parent company to buy enough stock to take control away from the U.S. company so that the foreign income earned by other subsidiaries is never subject to U.S. taxes. The new provision would continue to tax the controlled foreign corporation on its profits and deferred earnings.

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Other changes would make future inversions more difficult by making it harder for a foreign company to own enough of the company to avoid paying U.S. taxes.

The current rules require the new foreign owners to control more than 20 percent of the total stock after an inversion and the new rules would limit which assets can be used towards that threshold.

Senior Treasury officials complained that companies manipulate rules stipulating that the foreign partner own more than 20 percent of the combined company by either artificially shrinking the size of the U.S. firm or by inflating the size of the foreign company.

The administration took aim at those maneuvers by announcing it will ignore so-called skinny down dividends that U.S. companies issue prior to an inversion to reduce their relative size. It would also eliminate the ability of companies to dump assets in foreign subsidiaries in a related tactic known as “spinversions.”

The changes also eliminate the practice, known as a cash box, if at least 50 percent of the foreign corporation’s assets are passive. Banks and financial companies would be exempt.

The new rules will affect some inversion deals that have already been announced but haven’t closed.

That’s because the new regulations take effect on Monday, so any inversion plan that has already closed would be exempt. Those that have not been finalized would be subject to the new restrictions.

Asked whether that’s fair to companies that could find themselves on the wrong side of the line, a senior Treasury official said: “That’s just part of the process of doing guidance.” The official said, “whenever you do tax guidance or tax legislation with a particular day, there’s situations where folks are on one side of the line or the other.”

Asked why the administration is not making retroactive changes, as some lawmakers have proposed, the official said the announcement is consistent with how they normally implement new rules.

The Treasury Department did not take former Obama adviser and Harvard University professor Stephen Shay’s advice to target so-called earnings stripping by using its regulatory powers to reclassify company debt as equity.

Still, a Treasury official said the moves announced today were only the “first step,” and that it will be asking for public comment on a “wide” range of earning stripping issues.

Critics of the practice hoped last month’s news that Burger King plans to move its headquarters to Canada in part to slash its U.S. tax bill — making it by far the biggest name so far to announce inversion plans — would force Congress to act. But lawmakers left Washington last week without any agreement on a path forward and are not expected to return until after the November midterm elections.

Both Democrats and Republicans still insisted that Congressional action is the best solution. Senate Finance Committee Chairman Ron Wyden (D-Ore.), said in a statement that Congress should move legislation in the lame duck session later this year.

“Only Congress has the full range of tools to address both the immediate problem and ensure U.S. businesses continue to be competitive in the global economy,” he said.