U.S. Crackdown on Inversions Isn't All It's Cracked up to Be

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The Burger King logo is displayed at the post where the company's stock is traded on the floor of the New York Stock Exchange August 26, 2014. Brendan McDermid/Reuters

New Treasury Department rules designed to rein in tax-avoidance deals in which big American companies move overseas are unlikely to end the practice and are a diversion from broader tax reform.

The rules, issued late Monday, come on the heels of recent headline-making transactions, including a $12.5 billion deal by Miami-based Burger King Worldwide Inc. to acquire Canada-based Tim Horton's, a coffee-and-donuts chain, and relocate to Oakville, Ontario.

The deal has not been completed, but Tim Horton's said it was undeterred. "This transaction has been about long-term growth from the beginning, not about tax benefits, and as a result we are moving ahead as planned," Scott Bonikowsky, a Tim Horton's spokesman, told Newsweek by email on Tuesday.

Ken Kies, a finance-industry lobbyist in Washington, D.C., told Newsweek that the new rules "are not going to stop inversions. In fact, we're probably going to see more." He argues that the financial benefits of working around the edges of the rules outweigh the risks of the deals.

A handful of companies, including Minneapolis-based medical device maker Medtronic, which plans to buy Ireland-based Covidien for $43 billion, and AbbVie Inc., an Illinois pharmaceutical company which is buying Britain's Shire PLC for $54 billion, have pending inversions, two of the 19 that have announced or completed since January 2013.

Robert Willens, a corporate tax and accounting expert, wrote on Tuesday in a research note that he was "guardedly optimistic that these transactions will proceed to completion largely unaffected by Treasury's ambitious efforts to interdict inversions."

One prominent tax lawyer, David Rosenbloom at Caplin & Drysdale, said that a provision curbing the issuance of extraordinary dividends to reduce the size of a U.S. company was "highly questionable, legally," given their widespread use, current tax laws and the need for Congress to write an explicit law if the issue is to be amended. The extraordinary dividends provision is aimed at making it tougher for companies to circumvent a current rule requiring an inverted company's shareholders to own less than 80 percent of the new company.

However, he said, companies might be loath to mount an expensive, years-long battle with the Treasury Department and the Internal Revenue Service to fight the issue.

The new rules, which don't apply to transactions already completed as of yesterday, seek to block "hopscotch" loans in which U.S. companies access foreign cash without paying U.S. taxes, prevent inversion "lite," or "spinversions," in which a U.S. company spins off key revenue-producing units into a foreign affiliate; and curb the ability of American companies to limit the U.S. tax exposure of their foreign subsidiaries. Other provisions tighten up transfers and purchases of stock involving foreign affiliates that lower a company's U.S. tax bill.

Companies and bankers argue that the U.S. corporate tax rate of 35 percent is onerous and uncompetitive when compared to lower-tax regimes in Ireland, the Netherlands and other jurisdictions. Companies have to pay that 35 percent rate when they bring home, or repatriate, cash stockpiled offshore, a deterrent that has led Corporate America to hoard some $2.1 trillion overseas, according to a recent estimate by the Senate Finance Committee.

That makes the new rules something of a little fish in a big pond. After all, stopping inversions would save the Treasury just $19.5 billion over a decade through 2024, according to the Joint Committee on Taxation -- what the conservative Tax Foundation calls a minuscule 0.4 percent of the corporate tax base over that period.

"While the new rules are aggressive on the U.S. taxation of foreign income, they do nothing on income earned in the U.S., and then stripped out" to a foreign haven, James Hines Jr., a corporate taxation expert at the University of Michigan's law school. Referring to debate on overhauling the corporate tax code to make the United States, on paper at least, more competitive with other countries, Hines adds that "of all the tax issues confronting the country, inversions are a really small issue."

Even if it achieves some success, the victory may have costs: under current I.R.S. rules, Treasury makes some money on inversions, because shareholders have to recognize capital gains upon such deals, even if they don't sell their shares.

Iowa Republican Senator Charles Grassley, a senior member of the Senate Finance Committee, argues that today's inversions don't involve traditional offshore tax havens, like Bermuda, and instead reflect what he calls the anti-competitiveness of the U.S. tax system. "Tax reform," Grassley tells Newsweek. "is something Congress and the executive branch could accomplish instead of jumping from inversion crisis to crisis."