Obama has done it again. He has decided to circumvent Congress. This time the Obama administration is looking to crack down on tax inversions, a method for companies to establish their corporate headquarters overseas so that they can enjoy lower tax rates. The Obama administration has instructed the Treasury Department to take steps to discourage inversions.
Generally, a company looking to engage in a tax inversion will buy a smaller company abroad. Once the deal is complete, the American company will shift its corporate headquarters abroad, while leaving most of its core operations in the United States.
Inversions – Administration To Side Step Congress
Obama had sought out Congressional support for ending, or at least reducing, tax inversions but there was little chance of getting anything passed. Democrats have made some minor pushes to close the tax loophole, but Republicans have made it clear that such a step would only come as part of a comprehensive effort to overall the tax code.
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Republicans have essentially pushed for the lowering of the U.S. tax rate, and the closing of loopholes. Given that the United States has one of the highest official tax rates in the world, but the sheer number of loopholes often allow massive companies to get away with paying little in taxes, Republicans may have the right idea.
The political reality in Washington, however, suggests that reforming the U.S. tax code may simply be out of the question.
Treasury Department To Take Lead In Curbing Tax Inversions
The United States Treasury Department will lead efforts to discourage American companies from engaging in tax inversions. So far only about 50 or so companies have opted for an inversion, though that number has been steadily rising since the Great Recession. In fact, about half of all inversions have occurred since the crisis.
Among the new rules being adopted, companies who engage in tax inversions will not be able to use “hop-scotch” loans to avoid dividend taxes. Another law will be a limit on how much ownership American owners of the formerly American company can have in the new inverted company. This will make it difficult for companies that are primarily owned by Americans to use tax inversions.
American companies, such as Burger King Worldwide Inc (NYSE:BKW), who are considering a tax inversion, will now have to reconsider their potential moves. The new regulations are already in effect, so any deals that have not yet been closed will have to adhere to the new policies. The rules will not be retroactive, however, so any company that has already inverted will be protected.
The press release from the Treasury on inversions can be found here.