8th October 2014
The US has launched a series of new measures to prevent companies from transferring their headquarters overseas to avoid tax, a practice known as tax inversion. It sees US companies merge with a foreign business so it can move its headquarters to a lower-tax jurisdiction.
New rules set out by the US Treasury and Inland Revenue Service will make it much harder for US companies to limit their domestic taxation in this way, under a principle outlined by president Obama as “economic patriotism”.
Under the new measures, inversion deals will only be allowed if the US firm owns less than four-fifths of the overall business. US entities owning between 60 per cent and 80 per cent of the overall business will be allowed to invert, but the company will still have to pay some US taxes.
Treasury secretary Jacob Lew believes this will make companies “think twice” before undertaking an inversion to try to avoid American taxes. He explained the rules would make it harder for inversions to happen and mean they were “substantially less economically appealing”.
“This action will significantly diminish the ability of inverted companies to escape US taxation. For some companies considering deals, today’s action will mean that inversions no longer make economic sense,” he added.
Moving a firm's tax address is not the same as a merger driven by business reasons, such as efficiency or expansion, Mr Lew urged, adding that while legal, such practices were “wrong”.
He stressed that cross-border mergers make the US economy stronger as they enable companies to invest overseas and encourage foreign investment. “But these transactions should be primarily driven by genuine business strategies and economic efficiencies, not a desire to shift the tax residence of a parent company to a low-tax jurisdiction to avoid US taxes,” he said.
It forms part of the wider G20 and OECD discussions over cross-border taxation, which have seen numerous countries already tighten rules.
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