U.S. Treasury moves against tax-avoidance ‘inversion’ deals

(Reuters) – Moving against tax avoidance by corporations, the Obama administration took several actions on Monday to curb “inversion” deals that allow companies to escape high U.S. taxes by reincorporating abroad.

The Treasury Department announced new rules, effective immediately, that will reduce the tax benefits available to companies that have inverted, while also making new inversions more difficult to do and less potentially rewarding.

Because they took effect on Monday, the new rules might raise issues for some of a handful of companies that have agreed to do inversions, but have not yet completed them.

Fast-food chain Burger King Worldwide Inc (BKW.N) is in the midst of inverting to Canada in a deal with coffee-and-donuts vendor Tim Hortons Inc (THI.TO). A spokeswoman for Burger King said the company declined to comment.

Asked about the impact on pending deals, a senior Treasury official told reporters on a conference call: “If they are closed and done as of today, then they are not subject to this. If they are closed tomorrow or after, they are subject to this.”

President Barack Obama, who has sharply criticized inverting companies, said the Treasury Department’s steps would “discourage companies from taking advantage of corporate inversions – moving their tax residence overseas on paper to avoid paying their fair share in taxes here at home.”

The announcement of the rules followed months of growing concern on Capitol Hill, with Democrats urging prompt legislative action and Republicans pushing to address the problem later, perhaps in 2015, as part of a broader overhaul of the loophole-riddled federal tax code.

Companies that do inversions, which are legal and already subject to certain restrictions, say they are only trying to minimize their tax bills, which investors expect.

About 50 such deals have taken place since the early 1980s, but half of those have been completed just since the 2008-2009 credit crisis, according to a Reuters review.

MEDTRONIC DEAL PENDING

Inversions have surged in the past year, pursued by big companies such as Burger King and medical technology group Medtronic Inc (MDT.N), which is working to close an inversion deal into Ireland with rival Covidien Plc (COV.N).

Medtronic spokesman Fernando Vivanco late on Monday told Reuters: “We are studying Treasury’s actions. We will release our perspective on any potential impact on our pending acquisition of Covidien following our complete review.”

Medtronic has said it expects to close the Covidien acquisition by the end of this year or early 2015.

Inversions usually involve a U.S. corporation buying a smaller, foreign rival and redomiciling in its home country, where taxes are lower, even though core operations typically remain in the United States.

(Graphic on corporate inversions: reut.rs/1tWc9p7)

Treasury Secretary Lew said in a statement: “These first, targeted steps make substantial progress in constraining the creative techniques used to avoid U.S. taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and when possible, stopping them altogether.”

A key target of Treasury’s actions is foreign profits held offshore by U.S. multinationals under a U.S. Internal Revenue Service (IRS) rule that defers taxation on such profits unless and until they are brought into the United States.

One new Treasury rule will prevent inverted companies from using “hopscotch” loans that allow them to avoid dividend taxes when tapping such tax-deferred foreign profits. Another rule will bar inverters from gaining access to the same kinds of profits by using “decontrolling” strategies that restructure foreign units so they are no longer U.S.-controlled.

Treasury is also tightening limits on the levels of ownership that the former U.S. owners can have in an inverted company to qualify for foreign tax treatment from the IRS, a move that will make it harder to do these deals.

Some companies had feared that new rules might be imposed retroactively, but they were not.

Greg Valliere, chief political strategist at Potomac Research Group, said the administration “may succeed in chilling the climate for further deals, but this was not as strident as it could have been, especially in that they don’t do anything retroactively.”

SIDE-STEPPING CONGRESS

The rules were the administration’s latest effort to tackle what it sees as a pressing issue by taking executive actions that side-step a gridlocked Congress.

“When corporations choose to invert and don’t pay their fair share of taxes, they leave the rest of us to pick up the tab,” said Democratic Senator Dick Durbin in a statement.

“Today, the Obama administration put these corporate tax deserters on notice: we are not going to stand by while they game the tax code and avoid their responsibility to our country,” Durbin said.

Though in disagreement about the issue’s urgency, both Democrats and Republicans have said inversions are a symptom of a broken tax code that needs a thorough overhaul, a job that has eluded Congress and successive presidents since 1986.

Senator Orrin Hatch, the top Republican on the tax law-writing Senate Finance Committee, said in a statement: “In the end, any solution that permanently addresses inversions must be legislated by Congress.”

(Additional reporting by Emily Stephenson in Washington, Lisa Baertlein in Los Angeles, Susan Leach in Chicago, Bill Berkrot and Jeffrey Dastin in New York, Bernie Woodall in Detroit; Editing by Diane Craft, Steve Orlofsky, Andre Grenon and Lisa Shumaker)