Pressure for tax reform building as corporate ‘inversions’ continue, says expert
The reported resurgence of cross-border mergers involving US companies that then move their corporate headquarters abroad shows that anti-tax avoidance measures passed last year were “a sticking plaster rather than a long-term solution”, an expert has said17 Jun 2015
The Financial Times reported (registration required) that demand for corporate ‘inversion’ deals had increased in recent months, with the proposed unsolicited takeover of Switzerland’s Syngenta by US agricultural biotech firm Monsanto the latest example. The US Treasury and Internal Revenue Service (IRS) announced a series of policies designed to reduce the tax advantages of this type of restructuring at the end of September.
“Where there is strong commercial logic to a transaction, it will still go ahead, and any potential tax saving will be a bonus,” said tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com.
“The continuing trend for US multinationals to seek to escape the burden of the US tax system indicates that the pressure for reform is building, but the political stalemate makes this very difficult to achieve in practice. Another key issue is whether the outcome of the BEPS process [currently being coordinated by the Organisation for Economic Cooperation and Development (OECD)], which could well see other countries seeking to impose tax on US multinationals, will lead the US to bite the bullet and finally overhaul the US tax system,” she said.
Under US tax laws, corporate inversions occur when a US-headquartered multinational company restructures so that the US parent company is replaced by a company in a lower tax jurisdiction. Tax authorities in the US have said that the practice “erodes the US tax base” by allowing companies to avoid the US taxes they would otherwise be required to pay.
Changes to the rules introduced last year reduced some of the tax advantages available to inverted companies by preventing them from using certain complex loan structures to transfer funds to the new foreign parent company as a way of deferring US tax liabilities. Inverted companies were also prevented from restructuring foreign subsidiaries in order to access that subsidiary’s earnings tax free, and the Treasury also strengthened a requirement that the former owners of the US company own less than 80% of the new foreign company.
The OECD is current working on a single set of international tax rules to prevent multinational companies from artificially shifting profits to low-tax jurisdictions. Its 15-point ‘action plan’ on how to tackle these base erosion and profit shifting (BEPS) mechanisms, published in July 2013, included plans to neutralise so-called hybrid mismatch arrangements, prevent the abuse of tax treaties and ensure that transfer pricing rules do not allow companies to avoid being taxed in the jurisdictions where they make their profits. It is due to present its final recommendations to global leaders before the end of the year.
