Treasury Department Plans Anti-Inversion Tax Rules This Week
WASHINGTON—The U.S. Treasury Department will release new “targeted guidance” this week designed to reduce the tax benefits available to U.S. companies that move their tax addresses overseas.
Treasury Secretary Jack Lew informed lawmakers of the coming announcement in a letter on Wednesday, which provided no details on its intentions.
The administration previously has said it was examining “earnings stripping,” a practice by which companies load up their U.S. operations with deductions and effectively push profits to low-tax countries.
A person familiar with Treasury’s plans said the guidance would indeed focus on earnings stripping.
The Treasury’s notice of action comes as Pfizer Inc. considers a merger with Allergan PLC that could be structured as an inversion, where the new company would have its legal address outside the U.S. Pfizer would become the largest U.S. company to invert.
“Later this week, we intend to issue additional targeted guidance to deter and reduce further the economic benefits of corporate inversions,” wrote Mr. Lew, who renewed his call for anti-inversion legislation.
The administration wants Congress to prevent U.S. companies from inverting by buying smaller foreign firms.
“Unless and until Congress acts,” Mr. Lew wrote, “creative accountants and lawyers will continue to find new ways for companies to move their tax residences overseas and avoid paying taxes here at home.”
Rep. Sander Levin (D., Mich), the top Democrat on the House Ways and Means Committee, said he was “encouraged” by Treasury’s coming action.
“The fact that American companies, including Pfizer, continue to pursue inversions makes clear that additional steps are needed to stop this trend,” he said in a statement.
In September 2014, the Treasury Department announced a first wave of steps against inversions, including rules that could limit companies’ ability to use their offshore profits to finance a deal.
Those rules led AbbVie Inc. to abandon a planned inversion, though other companies moved ahead.
The Treasury hasn’t yet issued the formal regulations it promised last year, and congressional efforts to revamp the international tax system have stalled.
The September 2014 announcement included a warning that the Treasury Department was considering rules against earnings stripping and that if those rules applied only to inverted companies, they would be retroactive to Sept. 22, 2014.
That means the Treasury announcement coming later this week could affect companies such as Medtronic PLC and Mylan NV that finished their inversions in the past 14 months.
Companies pursuing inversions often promote the deals based on their ability to move cash around the world in ways they couldn’t if based in the U.S.
Often, the real benefit comes from earnings stripping, typically achieved through intracompany transactions that concentrate deductions in the U.S., with its 35% marginal tax rate, and concentrate income in jurisdictions with lower rates.
Earnings stripping has been challenging for the government to address with regulations, partly because there are some rules already written into the tax law and partly because the government wants to avoid harming legitimate cross-border transactions.
Treasury’s latest move also could cast doubt on the future of more than half a dozen inversions that were signed after September 2014 and haven’t yet been completed.
Among them: CF Industries Holdings Inc.’s purchase of Dutch fertilizer rival OCI NV and the merger of Coca-Cola Co.’s global bottling operations.
It also could complicate plans for seed giant Monsanto Co. as it mulls a renewed pursuit of Swiss counterpart Syngenta AG.