The Treasury Department issued new rules on corporate "inversions" that would limit U.S. multinationals' ability to access their foreign subsidiaries' earnings without paying U.S. taxes on them. The administration also made it more difficult for companies to conduct inversions in the first place: After an inversion, the previous owners of the U.S. multinational would have to own less than 80% of the new multinational, among other changes announced on Monday. The new rules "apply to deals closed today or after today," the Treasury said in a statement.
About six weeks ago, some congressional Democrats, including Sen. Elizabeth Warren (D-Mass.), publicly urged the White House to use executive powers to limit corporate tax "inversions." The Dems stood behind a legislative fix, including the proposed "Stop Corporate Inversions Act," but with Congress no longer legislating, it fell to the administration to act.
There was ample evidence to suggest the president's team was amenable to the suggestions. Indeed, Treasure Secretary Jack Lew acknowledged that officials were "looking at a very long list of possible ways to address the issue."
Suzy Khimm reported last night that the Obama administration is now moving forward with its policy decision.
As one might expect, congressional Democrats are delighted and congressional Republicans aren't, but the underlying question remains the same: just how much effect will these actions have in the absence of legal changes approved by Congress?
To briefly recap the debate for those just joining us, the basic idea behind the scheme is pretty straightforward: a large company based in the U.S. will purchase a small company abroad. To lower its tax bill, the American company will say the new, larger company actually exists in the foreign country, which just so happens to have a lower corporate tax rate.
As a rule, we're not talking about companies picking up and physically relocating; it's all just paperwork to reduce tax bills. All of this can be infuriating to the public, but it's also legally permissible.
That won't change, necessarily, under the new moves announced by the Obama administration yesterday -- inversions will still occur and still be legal. But as Danielle Kurtzleben noted, the idea is to "make it more difficult for companies to undertake inversions," while also making it tougher "to enjoy the benefits of those arrangements."
As part of the policy, companies will find it tougher "to reap the tax benefits of an inversion through creative methods like tax deferral and so-called "hopscotch loans," in which a foreign subsidiary of the U.S. company gives its profits in the form of a loan to the newly created, inverted company. The loan skips the U.S. and therefore avoids U.S. taxes on those dividends."
Congressional action would have a deeper and more systemic impact, but with a Republican-led House and GOP gains likely in the midterms, such legislation remains far in the future.