U.S. cracks down on companies moving overseas

Richard Rubin and Ian Katz
Bloomberg News

The U.S. Treasury Department announced steps that will make it harder for U.S. companies to move their addresses outside the country to reduce their taxes, clamping down on the practice known as inversions.

The rules, which apply to deals that closed Monday or after, include a prohibition on “hopscotch” loans that let companies access foreign cash without paying U.S. taxes and impose new curbs on actions that companies can take to make an inversion transaction qualify for favorable tax treatment.

Even without more authority from Congress or aggressive steps that former government officials had advocated, the new rules are expected to give companies and their advisers pause and require recalculation of some pending deals. President Barack Obama and Treasury Secretary Jacob J. Lew have urged Congress to pass a bill that would curtail inversions.

“We’ve recently seen a few large corporations announce plans to exploit this loophole, undercutting businesses that act responsibly and leaving the middle class to pay the bill,” Obama said in a statement Monday. “I’m glad that Secretary Lew is exploring additional actions to help reverse this trend.”

Lew told reporters on a conference call Monday that he wanted to make companies think twice before considering inversions, in which companies seek foreign addresses though their executives and major operations remain in the U.S.

Lew said Treasury is reviewing other potential actions it can take.

“This action will significantly diminish the ability of inverted companies to escape U.S. taxation,” he said. “For some companies considering deals, today’s action will mean that inversions no longer make economic sense.”

The changes could cause complications for companies including Medtronic Inc. that are counting on the benefits of tax-free access to foreign cash. Eight inversions are pending, including Burger King Worldwide Inc.’s planned merger with Tim Hortons Inc., which would put the combined company’s headquarters in Canada.

Another inversion involving Horizon Pharma Inc. closed on Sept. 19.

Congress deadlocked on legislation to curb inversions, and the Democratic-backed bills haven’t come to a vote.

Lew, who had said in July that Treasury lacked authority to stem inversions, reversed himself in August and the administration began studying its options. In recent days, Lew said the department was completing its work.

Under current law, U.S. companies that invert through a merger are still treated as domestic for tax purposes if the former U.S. company’s shareholders own more than 80 percent of the combined company. The administration wants to reduce that 80 percent number to 50 percent; that requires legislation.

In the absence of legislation, the Treasury Department looked for ways to make it harder for companies to get around the 80 percent limit.

The rules announced seek to limit so-called spin-versions, in which U.S. companies spin off units into a foreign company.

It also would restrict the use of a technique known as skinnying down, in which companies make special dividends to reduce their size before a merger to meet the current law’s requirements. U.S. companies would be less able to seek out so-called old and cold foreign companies with cash and other passive assets as merger partners to meet the rules.

Other changes announced in the rules would make it harder for inverted companies to relinquish control of their foreign subsidiaries to get them out of the U.S. tax code’s orbit. U.S. companies must pay taxes when they repatriate foreign profits.

Investors have been watching for signs of what the Treasury would do because the changes could penalize or unravel some of the pending inversion deals.

Scott Bonikowsky, a spokesman for Tim Hortons, didn’t immediately respond to messages seeking comment. Burger King, based in Miami, Florida, didn’t respond to a request for comment.

Emails and calls to spokesmen at Medtronic, Mylan Inc., AbbVie Inc. and Pfizer Inc. after business hours were not immediately returned. Medtronic, Mylan and AbbVie all have inversion deals pending. Pfizer’s bid for London-based AstraZeneca Plc failed in May, but CEO Ian Read has said he is still looking for an inversion opportunity.

Lawmakers haven’t shown much interest in writing bipartisan legislation to curtail inversions. Most Republicans say the issue should be addressed as part of a broader revamp of the U.S. tax code.