Corporate tax inversions
U.S. tax authorities act to reduce inversion activities.
October 30, 2014
As the U.S. economy continues to rebound, corporate America has sought to further improve its bottom line. From reducing property and payroll costs to tightening budgets, the incentive to increase the wealth and satisfaction of shareholders is an ever-present goal for corporate taxpayers.
One means of achieving that goal, which has received much scrutiny in recent months, involves corporate inversions. Both taxpayers and taxing authorities face a dilemma in determining if these are indeed tax loopholes and, if they are, should the loopholes be closed? In response, the Treasury Department issued Notice 2014-52 in September to curb future inversion activity.
Corporate tax inversions: What are they?
Corporate tax inversions are governed by Sec. 7874 and the corresponding regulations. These provisions were enacted to restrict expatriation transactions, in which a corporation seeks to relocate its headquarters to a lower-tax foreign jurisdiction while operations remain in a higher-tax jurisdiction (usually the jurisdiction where the corporation originated). By relocating or inverting its structure so that the new parent corporation has its headquarters in a low-tax or no-tax foreign jurisdiction, the corporation can avoid U.S. taxes without substantially affecting its current operations.
This strategy has caused much debate in recent years. U.S. corporations, on the one hand, have argued that foreign relocation using inversion techniques benefits the economy by spurring cross-border activity. The IRS and Treasury, as well as President Barack Obama and his congressional supporters, on the other hand, argue that the corporate inversions are inconsistent with those Code provisions that govern daily operations, as well as mergers and acquisitions, with foreign corporations.
In response to the perception that corporate inversions are increasing, Treasury issued Notice 2014-52 in an attempt to curtail inversion activity, including, but not limited to, announcing the intent to issue regulations under Secs. 367, 956, and 7874. The Fact Sheet explaining what Notice 2014-52 was attempting to accomplish under the new rules, which are effective Sept. 22, 2014, can be compared to the tax law in place before this development:
News of corporate inversions has dominated the corporate tax landscape in recent months (and also has dominated the business news media). For instance, just last week, Ireland acted to close a tax loophole that gave multinational corporations a substantial tax incentive, colloquially called the “double Irish,” which involves setting up two Irish subsidiaries and funneling profits to a no-tax jurisdiction such as Bermuda (see article here). While corporate inversions will undoubtedly continue to receive attention, both domestic and foreign taxing authorities have taken notice and are acting to close or significantly reduce access to these loopholes.
Any U.S. company still considering an inversion transaction should consult its tax adviser, as the rules governing these transactions, both domestically and abroad, are complex and require intricate analysis to achieve the desired results.
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Stephen J. Ehrenberg, CPA, MBT, is a tax principal in the Los Angeles office of Holthouse Carlin & Van Trigt LLP.