US crackdown on multinational tax avoidance
In a move that may stop a number of current take-overs of UK companies by US buyers, the US Department of the Treasury and the Internal Revenue Service (IRS) have jointly announced the introduction of some important new measures to target US multinationals that seek to avoid US tax. The measure being targeted is known as corporate tax inversions which involve US multinationals using tax structures so that the U.S. parent is replaced by a foreign corporation, in order to avoid U.S. taxes. This is the first concrete move by the Obama administration to tackle this issue and to be more effective will require the support of the US Congress when it returns to Washington in November.
The US Treasury is clear that genuine cross-border mergers make the U.S. economy stronger by enabling U.S. companies to invest overseas and encouraging foreign investment to flow into the United States. However, these transactions should be driven by genuine business strategies and economic efficiencies, not a desire to shift the tax residence of the parent entity to a low-tax jurisdiction simply to avoid U.S. taxes.
Specifically, the new rules eliminate certain techniques inverted companies currently use to access the overseas earnings of foreign subsidiaries of the US multinational that inverts without paying U.S. tax. The measures apply with effect to deals closed on or after 22 September 2014.
The Treasury Secretary Jacob Lew said the new rules would help close what he called
‘… a glaring loophole in the U.S. tax code — inversions — an unfair practice in which corporations acquire foreign businesses and then switch their citizenship outside the United States to avoid paying U.S. taxes.’