The Treasury Department and Internal Revenue Service released late Thursday further measures to rein in corporate tax inversions that allow companies to move their tax residence overseas to avoid paying U.S. taxes.
Treasury Secretary Jack Lew said the notice released Thursday adds to the “targeted action” Treasury took last year, which made it more difficult for companies to “undertake an inversion and reduce the economic benefits of doing so.” Lew said last year’s action “made a real difference by reducing some of the economic benefits of inversions, resulting in a decline in the pace of these transactions.”
However, he said, while Treasury intends to take additional action in the coming months, only legislation “can decisively stop” inversions.
The Thursday notice makes it more difficult for U.S. companies to invert by:
–Limiting the ability of U.S. companies to combine with foreign entities using a new foreign parent located in a “third country”;
–Limiting the ability of U.S. companies to inflate the new foreign parent corporation’s size and therefore avoid the 80% ownership rule, and
–Requiring the new foreign parent to be a tax resident of the country where the foreign parent is created or organized to satisfy the business activities exception.
The notice also reduces the tax benefits of inversions by limiting the ability of an inverted company to transfer its foreign operations to the new foreign parent after an inversion transaction without paying current U.S. tax.