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The Obama Administration announced late Monday that it is taking the first steps toward eliminating corporate tax inversions, a procedure in which a US-based business merges with a company located elsewhere, then restructures with that foreign company as a parent in order to take advantage of a foreign country's tax rates.
The new policies will make it more difficult for companies to undertake inversions and will also will make it tougher to enjoy the benefits of those arrangements.
One measure will toughen a requirement already on the books that says the US company that was formerly the parent must own less than 80 percent of the new combined company. Other measures will make it harder 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 US company gives its profits in the form of a loan to the newly created, inverted company. The loan skips the US and therefore avoids US taxes on those dividends.
Tax inversions are legal — Burger King is buying Canada's Tim Horton's in order to avoid US tax payment — and the practice is also becoming increasingly common, as companies both seek to avoid high US tax rates and sense no real crackdown coming from Congress, as my colleague Matt Yglesias explained earlier this year.
Earlier this year, the Obama administration put forth a plan designed to curb inversions, including it in his fiscal year 2015 budget, which Congress has zero chance of passing. In a statement on the new rules, Treasury Secretary Jack Lew made it clear that the administration thinks it would be preferable for Congress to change the law, rather than the Treasury taking action.
"While comprehensive business tax reform that includes specific anti-inversion provisions is the best way to address the recent surge of inversions, we cannot wait to address this problem," Lew said in a statement.
Members of Congress broadly agree that corporate tax reform needs to happen, but they also disagree heavily on the particulars. Both the chairman and ranking member of the Senate Finance Committee today responded to the Treasury's action by agreeing action must be taken, then spelling out different courses of action.
Chairman Ron Wyden (D-Ore.) advocated passing "a series of stopgap reforms to the tax code that siphon the economic juice out of inversions," listing various ways in which he hopes to stop the practice. Ranking Member Orrin Hatch (R-Utah), meanwhile, said that he likewise wanted a stopgap measure, but that it also must follow specific principles he has laid out, including moving toward a territorial tax system (in which US companies only pay tax on their domestic earnings) and being revenue neutral.
