President Barack Obama talks with Jack Lew outside the Oval Office.
As
promised, Treasury Secretary Jack Lew announced Monday that the Obama administration is going to
use its regulatory authority to crack down on corporate inversions, the strategy corporations have used to avoid paying taxes by buying up foreign companies and relocating their headquarters overseas. The most recent example is Burger King, which bought Canadian coffee purveyor Tim Horton's. The new regulations are intended to both make existing inversions less lucrative and to make future inversions more difficult.
The first provision aimed at making inversions less appealing would prevent companies from using what Treasury called “creative” loans to move profits among overseas subsidiaries to avoid paying taxes on dividend payments. The so-called hopscotch loans allow the controlled foreign corporation that owes dividends to make a loan to the new foreign “parent” company to avoid U.S. taxation.
The new Treasury rules would consider value of the loans taxable as U.S. property and apply dividend rules to loans made to the U.S. parent company before the inversion.
Current rules allow the foreign parent company to buy enough stock to take control away from the U.S. company so that the foreign income earned by other subsidiaries is never subject to U.S. taxes. The new provision would continue to tax the controlled foreign corporation on its profits and deferred earnings.
Additionally, the new rules will make it harder for companies to fudge the rule that new foreign owners control more than 20 percent of the company's total stock after an inversion. The new rules apply to future inversions, but also to maneuvers now in progress that haven't been completed.
Republicans in Congress, who need to act to actually end this loophole reacted predictably: "A few campaign-style speeches and stopgap measures from Treasury won’t do it—it hasn’t worked in the past, and even Secretary Lew admits the only real solution is tax reform," House Ways and Means Chairman David Camp sniffed. Of course, the Republican House has failed to move on tax reform and despite a lot of noise from Camp about doing it, doesn't appear to be actually motivated to do anything about it. Once again, they've forced President Obama to try to find an imperfect solution that is within the executive's power to implement, a solution which they can then attack as doing too little.
