Treasury cracks down on corporate tax 'inversions'

WASHINGTON — The Treasury Department will crack down on so-called tax "inversions," targeting companies that try to avoid taxes by moving their headquarters overseas.

Treasury Secretary Jacob Lew said the new rules would help close what he called a "glaring loophole in the U.S. tax code" in which U.S. companies acquire foreign businesses and then switch their citizenship to avoid paying U.S. taxes.

One rule, for example, would make it more difficult for a smaller foreign company to take over a larger U.S. company, strengthening a requirement that the American-owned company own less than 80% of the new, foreign company. When the former American parent is more than 60% but less than 80% of the new company — as most recent inversion deals have been — the merger would be allowed but with significant tax consequences.

Another rule would target so-called "hopscotch" loans, in which companies get around taxes on dividends by instead distributing their earnings in the form of a loan to the foreign company. Those would now be taxable in the United States.

The Treasury Department is still fleshing out the details on the new guidance, but it is putting companies on notice that deals that close on or after Monday's announcement will be subject to the new tax rules.

"For some companies considering deals, today's actions may mean that those transactions no longer make economic sense," Lew said. He said more actions could be on the way.

Lew said the Treasury Department was also careful to target cases where the mergers were primarily for tax avoidance. "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," he said.

Inversions aren't a new problem, but a number of high-profile deals have rekindled interest in addressing the issue. Burger King is in talks to be acquired by Canadian company Tim Hortons, and an outcry over a similar plan by drugstore chain Walgreens caused that company to abandon its inversion plans.

One prominent Republican said the rules show the Obama administration "is only interested in doing the bare minimum — just enough to say they care."

"We've been down this rabbit hole before, and until the White House gets serious about tax reform, we are going to keep losing good companies and jobs to countries that have or are actively reforming their tax laws," said House Ways and Means Committee Chairman Dave Camp, R-Mich.

White House Press Secretary Josh Earnest said Monday the Obama administration would prefer to have Congress deal with the issue as part of a larger reform of corporate taxes. One reason: The administration can only make the rules apply to future deals.

"We would like to see Congress pass a measure that would be retroactive to ensure that companies who are trying to game the system and beat Congress to the punchline here are not able to do so — or at least, they're not able to benefit from it," Earnest said.

Senate Finance Committee Chairman Ron Wyden, D-Ore., is working on a bipartisan bill that would block inversions retroactive to May 8. The bipartisan Joint Committee on Taxation says that proposal would raise revenues by $19 billion over 10 years.

Wyden said the Treasury announcement "reinforces the urgency for action before this growing wave of inversions erodes our nation's tax base." He said he hopes Congress can act in the "lame-duck" session after the Nov. 4 election.

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