Over the past two years, a number of high profiled transactions involved U.S. domiciled multi-national companies acquiring a foreign-based company resulting in the U.S.-based acquirer changing its domicile to the country of the foreign company that it had acquired.  This is broadly referred to as an "inversion" transaction, which is the latest scrimmage in the corporate tax wars. Inversions have been popular among the multi-national companies with significant cash outside of the United States.  Under the existing law, a U.S. based company will have to pay U.S. tax on its non-U.S. based earnings when those earning are brought (repatriated) into the United States. With U.S. corporate tax rates sitting atop of all industrialized nations, repatriating foreign earnings into the U.S. has been a prohibitively expensive proposition for these multi-national companies.  As of 2012, it was estimated that U.S. based multi-national companies had over $2 trillion of cash outside of the U.S.  With corporate earnings at record highs, this number has undoubtedly grown in the past two years. One of the major benefits of an inversion transaction is that after it is completed, a U.S. corporation can distribute its untaxed earnings to its now foreign parent without U.S. taxation.

Some of the most high profile inversion transactions have involved pharmaceutical and life-sciences companies.  In recent years, Mylan Inc. acquired a foreign-based generic drug company that resulted in Mylan becoming domiciled in the Netherlands.  AbbVie Inc.'s proposed acquisition of Shire PLC would allow it to become a UK domiciled company.  Perrigo Corporation is now domiciled in Ireland as a result of its acquisition of Elan Corp.  Many other companies, including the recently announced acquisition of Canadian-based Tim Hortons by U.S.-based Burger King will result in inversions.

The Obama Administration has perceived this to be a major threat to the fiscal well-being of the U.S. and has long threatened to curb these so-called inversion transactions through administrative action. On September 22, 2014, the administration made good on its threat by issuing new rules that take away major benefits of the inversion transactions.

The administration made regulatory changes and will propose others to five separate sections of the tax code in order to make inversion  transactions more difficult to undertake and more costly by imposing U.S. corporate taxes more broadly.

One of the rule changes would make it more difficult for a smaller foreign company to take over a larger U.S. company. The acquisition would still be allowed, but with significant tax consequences. Other moves are aimed at blocking inverted companies to get access to their offshore cash through the use of so called hopscotch” loans. There are also new rules making ownership standards in inversion transaction more onerous. These new rules would apply to transactions closed on or after September 22, 2014.

These new rules may well be challenged as tax experts have questioned the extent of the Treasury Department's authority in making these changes without legislative change.

Farshad Yashar
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Farshad Yashar

CATEGORIES Taxing Thoughts,

Farshad Yashar, CPA, CFA, has more than 25 years of tax experience with two major accounting firms. He has extensive experience in taxation of corporations, flow-through entities, financial products and real estate. His experience includes advising buy and sell-side clients with respect to tax…Learn More