Washington: In view of the pharmaceutical giant Pfizer's plans to merge itself with Ireland-based Allergan, the US has announced imposition of additional measures to prevent corporate tax inversions.
Department of the Treasury and Internal Revenue Service (IRS) yesterday issued temporary and proposed regulations to further reduce the benefits of and limit the number of corporate tax inversions, including by addressing earnings stripping.
By undertaking an inversion transaction, companies move their tax residence overseas to avoid US taxes without making significant changes in their business operations.
After an inversion, many of these companies continue to take advantage of the benefits of being based in the United States, while shifting a greater tax burden to other businesses and American families.
"Today, we are announcing additional actions to further rein in inversions and reduce the ability of companies to avoid taxes through earnings stripping," Treasury Secretary Jacob Lew said.
"I urge Congress to move forward with anti-inversion legislation this year.
Ultimately, the best way to address inversions is to reform our business tax system, which is why Treasury is releasing an updated framework on business tax reform, outlining the administration's proposals to date as a guide for future reform.
While that work goes on, Congress should not wait to act as inversions continue to erode our tax base," he said.
The Treasury took action to limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of US companies.
It will prevent a foreign company (including a recent inverter) that acquires multiple American companies in stock-based transactions from using the resulting increase in size to avoid the current inversion thresholds for a subsequent US acquisition, a media statement said.
"If these requirements are not met, instruments will be treated as equity for tax purposes," the Treasury said.
Supporting the latest action, the White House said President Barack Obama is pleased that the Department of Treasury is acting again to discourage companies from taking advantage of a corporate inversion.
"It erodes the American tax base, undercuts businesses that play by the rules and ultimately leaves the middle class and small businesses to pay the tab.
"Business decisions should be driven by genuine business strategies and economic efficiencies, not accounting gimmicks that game our broken tax system," White House Press Secretary Josh Earnest said.