US to curb ‘earnings stripping’ in tax inversions rules

The US took another step to crack down on the benefits of corporate tax inversions, announcing rules to limit the ability of US companies to avoid taxes by issuing debt to their foreign parents. The Treasury Department said Monday it will introduce regulations to make it more difficult to engage in a tax strategy known as “earnings stripping,” which enables US subsidiaries to reduce their tax bills, since interest payments to their foreign parents are tax deductible. The Treasury also announced rules that would limit the ability of companies to undertake new inversions if they have already done them recently. In a corporate inversion, a US company acquires a smaller foreign firm and transfers its tax address offshore. It wasn’t immediately clear whether those provisions would affect any pending restructurings. The largest such transaction involves Pfizer Inc.’s planned $160 billion merger with Allergan Plc, which is expected to close later this year - though that deal doesn’t meet the technical definition of an inversion, because Pfizer shareholders will own 56 percent of the new company. (The threshold is 60 percent.) Allergan shares plunged 20 percent to $223 at 5:59 p.m. in New York trading after the market closed. Pfizer shares rose less than 1 percent to $31. Pfizer is reviewing the Treasury Department’s announcement, said Joan Campion, a company spokeswoman. “We won’t speculate on any potential impact until the review is completed,” she said. Under the rules announced Monday, certain securities previously considered debt will be at least partially treated as stock, making it more difficult for foreign companies to load up their US units with related-party debt, the Treasury said. The rules will apply to securities issued after April 4, and the department plans to move “swiftly” to finalize the regulations. “For years, companies have been taking advantage of a system that allows them to move their tax residences overseas to avoid US taxes without making significant changes in their business operations,” Treasury Secretary Jacob J. Lew said on a conference call with reporters. “We will continue to explore additional ways to limit inversions.” Inversions have become a political flash point, with presidential candidates including Hillary Clinton and Donald Trump promising to discourage the practice. (Bloomberg)