The Secretary of Treasury, Jacob Lew, signed off on changes to the current inversion tax rules in the Internal Revenue Code. These new rules are not retroactive and only affect either pending or future inversions. Presently there are eight US companies with pending inversions, see Medtronic Inc., AbbVie Inc., etc. Per the Department of Treasury, the following directives are in place:
- Prevent inverted companies from accessing a foreign subsidiary’s earnings while deferring U.S. tax through the use of creative loans, which are known as “hopscotch” loans
- Prevent inverted companies from restructuring a foreign subsidiary in order to access the subsidiary’s earnings tax-free
- Close a loophole to prevent an inverted companies from transferring cash or property from a CFC to the new parent to completely avoid U.S. tax
- Make it more difficult for U.S. entities to invert by strengthening the requirement that the former owners of the U.S. entity own less than 80 percent of the new combined entity
Case Study: Medtronic
In its purchase of Covidien Plc, Medtronic is loaning untaxed profits to its new Irish parent company. Under these newly issued rules because this inversion is pending, this tax structure could be determined void and Medtronic may be penalized by the aforementioned anti-hopscotch rule. An Economist article on 09-20-14 called “Inequality and the Narrowing Tax Base,” indicates that “Five American industries account for 81% of the country’s (US) corporate tax revenue, but just a third of its (overall) companies.” While the actions taken by the Treasury today are a good step forward, there needs to be a more comprehensive approach that involves lowering the corporate tax rate, broadening the tax base and approaching the foreign jurisdictions with a multinational perspective instead of the usual bilateral tax treaty that creates inefficiencies for lack of scope.