Subscribe
First Look

Can new tax rules stop US corporations from moving overseas?

The Treasury Department released final regulations on Thursday to curb the practice of US corporations moving abroad to avoid paying corporate taxes.

  • close
    The biggest American drugmaker, Pfizer Inc., will stay put thanks to aggressive new Treasury Department rules that succeeded in blocking Pfizer from acquiring rival Allergan and moving to Ireland, on paper, to reduce its tax bill.
    Richard Drew/AP/File
    View Caption
  • About video ads
    View Caption
of

To curb the trend of US companies moving abroad to avoid paying taxes, the Treasury Department announced final regulations targeting this practice on Thursday after months of hearing from corporations and trade groups.

The rules were a long time coming. When they were first proposed in April, corporations protested that the restrictions were too stringent. The department acceded to some requests, and released this new set of rulings that creates more exemptions for different types of corporation transactions. But the regulation will still restrict the ability for many companies to engage in these practices, and the government estimates that it will collect between $461 million and $600 million annually through these new rules, as reported by The Wall Street Journal. 

Avoiding taxes by shifting operations abroad has been a popular strategy among US corporations. According to Bloomberg, more than 50 US companies have done it since 1982. The rate has picked up since 2012, despite rule-tightening by President Obama in 2014, with examples from Medtronic and Burger King. Pharmaceutical giant Pfizer called off a plan to acquire Irish firm Allergen earlier this year, after the Treasury Department announced new rules. 

But reactions from trade groups and politicians have been mixed. It appears that while there is a consensus that the problem is hurting the country’s tax base, they differ on what is the best way to fix it.

The practice of moving a company to a country that has lower taxes by acquiring a smaller foreign firm is known as "corporate inversion." In a technique known as "earnings stripping," the foreign counterpart then makes a loan to the US company, who then deducts interest payments on this debt in the United States. Meanwhile, they effectively push profits abroad, where many foreign countries pay a lower tax rate.

"I think when the rule is studied, it will be clear that this is meant to get at egregious tax behavior, not at normal business practices," Treasury Secretary Jack Lew told CNBC.

"There's a lot of frustration in the United States and around the world in tax systems that just don't seem fair," he added. "I think we've shown that we're taking tough action to stop the egregious behavior, but we're also listening and responding to reasonable concerns." 

Many Republican lawmakers believe that the US corporate income tax rate of 35 percent, which is the highest in the developed world, should be lowered in the first place, and that a full revamp of the tax code is needed to curb the trend. Republican presidential candidate Donald Trump has suggested the same solution by proposing a cut to 15 percent. 

"By rushing the review process – despite the extensive comments received – and finalizing these regulations so quickly, it appears that the Obama administration has ignored the real concerns of people who will be most impacted by these far-reaching rules," said Rep. Kevin Brady (R) of Texas, chairman of the House Ways and Means Committee, according to The Wall Street Journal.

Sen. Orrin Hatch (R) of Utah said the rules could "jeopardize American businesses and the US economy," as the Associated Press reported.

On the other hand, some Democrats think that the tax rate should be lowered, as Mr. Obama suggests, but that tax loopholes like corporate inversion should also be closed. Democratic presidential candidate Hillary Clinton has proposed an "exit tax" as a solution. 

"If Republicans are serious about reforming our tax code and making it fairer for all Americans," Michigan representative Sander Levin, the top Democrat on the tax-writing House Ways and Means Committee, said to the Associated Press, "they should begin by joining with Democrats to pass legislation to close corporate tax loopholes."

Mr. Lew said the Treasury drew up the regulations because, in part, of Congress' inability to agree on a solution. He would have preferred that Congress revamp the business tax system, according to the Wall Street Journal, and said he hopes Congress could do so early in the next administration.

The final rules ease documentation requirements for corporations and exempt cash pools, short-term loans. They also allow limited exemptions for transactions between foreign subsidiaries of US multinational corporations, between insurance companies, between financial companies, and between mutual funds and real estate investment trusts. 

About these ads
Sponsored Content by LockerDome
 
 
Make a Difference
Inspired? Here are some ways to make a difference on this issue.
FREE Newsletters
Get the Monitor stories you care about delivered to your inbox.
 

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.

Loading...

Loading...

Loading...

Save for later

Save
Cancel

Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items

OK

Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items

OK

Failed to save

You have already saved this item.

View Saved Items

OK