The U.S. Department of the Treasury took action Sept. 22 to curb corporate tax inversions, making it more difficult for U.S. companies to merge with international firms and move abroad to reduce their taxes.
This move attempts to combat specific abuses within a flawed framework, according to an international tax law expert at Washington University in St. Louis’ School of Law.
“The proposals seem for the most part to be sensible, anti-abuse-type rules within the current legal framework,” said Adam Rosenzweig, JD, professor of law. “I believe a number of the proposals had been around before, such as the so-called ‘anti-hopscotch’ rule, which I believe is correct as a matter of policy in my opinion.”
Before these rules by the Treasury Department, inverted companies were able to avoid taxes on dividends by making loans to the foreign parent company instead of the U.S. parent firm.
The new rules make these “hopscotch” loans taxable as dividends.
“Some of the other proposals address specific ways taxpayers tried to get around the existing anti-inversion legislation, such as stuffing cash into the foreign acquirer to make it larger or stripping cash out of the U.S. company to make it smaller,” Rosenzweig said. “These make sense, but they are narrowly targeted at specific structures considered abusive.
“For the most part, these proposals did not adopt any of the recently reported ideas that would have attempted to prevent most or all inversions or make them unattractive across-the-board,” he said. “It appears that Treasury was attempting to be careful to act within its clearly existing authority rather than try to extend its authority into new or novel approaches.”
After acquiring Tim Hortons Inc. in August, the group of investors that controls Burger King Worldwide Inc. was able to avoid the so-called “Helen of Troy” regulations, a 1996 attempt by Treasury to limit inversions.
“In general, using a partnership to avoid the Helen of Troy regulations seems to me an abuse of the partnership form, and should be disallowed under existing regulatory and administrative authority,” Rosenzweig said.