Tax Tip of the Week | No. 271 | Treasury to Reduce Tax Benefits of Corporate Inversions

Tax Tip of the Week | Oct 8, 2014 | No. 271 | Treasury to Reduce Tax Benefits of Corporate InversionsArticle from the Ohio Society of CPAs....

The U.S. Treasury Department has changed some key tax rules to discourage so-called "tax inversions," in which American companies reincorporate their headquarters overseas to avoid U.S. taxes. The newly tightened rules make it more difficult to use cash that a company might be gathering in foreign countries.The Treasury and the IRS on Sept. 22 issued Notice 2014-52 that takes targeted action to reduce the tax benefits of — and when possible, stop — corporate tax inversions. The Treasury has said such transactions erode the U.S. tax base, unfairly placing a larger burden on all other taxpayers.Some officials had previously spoken of making rule changes retroactive to a certain date – thus affecting companies that couldn't possibly know such a change was coming – but these new guidelines only apply to deals that had not closed as of Sept. 22.More than two years ago, President Obama laid out his framework for business tax reform. In addition, the Administration’s FY 2015 budget included a legislative plan to reduce the incentives to invert as well as make it more difficult to accomplish an inversion. Treasury Secretary Jack Lew has been urging Congress to move forward with anti-inversion legislation, which is the only way to fully rein in these transactions.“These first, targeted steps make substantial progress in constraining the creative techniques used to avoid U.S. taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and when possible, stopping them altogether,” Lew said. “While comprehensive business tax reform that includes specific anti-inversion provisions is the best way to address the recent surge of inversions, we cannot wait to address this problem. The Treasury will continue to review a broad range of authorities for further anti-inversion measures as part of our continued work to close loopholes that allow some taxpayers to avoid paying their fair share.”Genuine cross-border mergers make the U.S. economy stronger by enabling U.S. companies to invest overseas and encouraging foreign investment to flow into the U.S. But the Treasury has emphasized that these transactions should be driven by genuine business strategies and economic efficiencies, not just a desire to shift the tax residence of the parent entity to a low-tax jurisdiction and to avoid U.S. taxes.Specifically, this action eliminates certain techniques inverted companies currently use to gain tax-free access to the deferred earnings of a foreign subsidiary, significantly diminishing the ability of inverted companies to escape U.S. taxation. It also makes it more difficult for U.S. entities to invert by strengthening the requirement that the former owners of the U.S. company own less than 80% of the new combined entity. For some companies considering mergers, the new rules will mean that inversions no longer make economic sense.The Treasury said it will continue to examine ways to reduce the tax benefits of inversions, including through additional regulatory guidance as well as by reviewing our tax treaties and other international commitments.

You can contact us in Dayton at 937-436-3133 and in Xenia at 937-372-3504.  Or visit our website.

Rick Prewitt - the guy behind TTW...until next week.