Tax regulations

Treasury cuts anti-inversion tax regulations


The Treasury Department is cutting back on Obama-era rules designed to limit corporate tax reversal deals, deeming the regulations too onerous and less necessary.

The administration on Thursday removed rules requiring companies to document certain internal loans and said it would propose changes to streamline other regulations.

The measures taken by the government appear unlikely to revive deals in which American companies have taken addresses abroad and reduced their tax bills. These reversal deals are less attractive than they were before, due to the lower U.S. corporate tax rate, new restrictions in the 2017 tax law, and remaining anti-avoidance rules that have failed. been modified.

“Because tax cuts have made our business environment more competitive, we are now able to eliminate regulatory burdens that have become obsolete, further reducing costs for job creators and hard-working Americans,” and protect the US tax base, ”Treasury Secretary Steven Mnuchin said in a statement. declaration.

At the start of this decade, companies embarked on a series of reversal deals, prompting a political backlash and the Obama administration’s regulatory response.

Typically, in a reversal, an American company and a slightly smaller foreign company would merge. The combined company would take the address overseas even if the location of executives and other activities barely changed.

Companies such as Johnson Controls International PLC and Medtronic PLC used the maneuver and Pfizer Inc.

tried to do it.

The biggest benefit of a reversal was the ability to engage in what is known as payout stripping. A foreign parent company could charge its US subsidiary with internal debt, payable to the foreign parent company.

The US entity could then deduct the interest, reducing the amount of income taxed to what was then a 35% tax rate. The foreign parent would receive income, taxed at lower rates abroad.

The Obama administration has responded with a series of regulations, making it more difficult for companies to enter into reverse deals and limiting the benefits of this profit stripping. These efforts included easing regulation, which allows the government to treat some of this corporate internal debt as equity.

In addition to reverse companies, the regulation also covered foreign companies with cross-border debts.

The big reversal deals slowed down and then came to a halt.

The companies, however, said the regulations were too onerous and argued that they were beyond the powers of the Treasury. They had pushed the government to cut regulations since their first proposal by the Obama administration in 2016 – and the rules became particularly vulnerable once President Trump was elected.

The 2017 tax law changed the calculation of inversions. He lowered the corporate tax rate in the United States from 35% to 21% and tightened the limits on interest deductions, a combination that reduced the opportunity for arbitrage for companies. The law also introduced the Base Erosion and Anti-Abuse Tax, or BEAT, a new minimum tax that hits internal cross-border business transactions and thus limits profit stripping.

“The changes to the tax cuts and jobs law affect some but not all,” said Mark Mazur, who was the senior treasury tax official in the Obama administration. “Personally, I would think of having both [the law and regulations] out there as a belt and suspenders approach, that you try to cover all possible deals.

Recently, a few reversals have started to reverse, a sign that the remaining slight benefits of an overseas address may not be worth the reputation costs for some businesses. Mylan NV and Allergan PLC, pharmaceutical companies that took addresses overseas a few years ago, are both engaged in deals that would give them addresses in the United States.

“By potentially removing these overly burdensome regulations that have hurt the economic competitiveness of the United States, the administration is taking a big step forward,” said Nancy McLernon, President and CEO of the Investment Organization. international, a trade group representing foreign companies in the US

A senior treasury official said the rules requiring documentation of internal loans were too onerous. This part of the rules had never taken effect. The administration had previously offered to withdraw them, a move that became formal Thursday.

In addition, the changes proposed Thursday would repeal rules that automatically treated certain separate transactions between parent companies and subsidiaries as related transactions that could be classified as equity instead of debt. The government intends to propose a new standard.

In 2016, the government estimated that the rules would have increased tax collections by up to $ 600 million per year. There is no updated estimate as Thursday’s post is only a guess.

“Expect already weak regulation to weaken from a president who thinks he’s so ‘smart’ about not paying his own taxes,” said Representative Lloyd Doggett (D. , Texas). “This disturbing action will simply encourage more businesses to avoid taxes by renouncing their US citizenship.”

Write to Richard Rubin at [email protected]

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