American businesses complain about U.S. Treasury Department’s move against tax inversions
US business groups on Tuesday blasted as counter-productive the government’s moves to curb tax inversion mergers that allow a company to escape US taxes.
But analysts said the rules could prove only partly successful at stemming corporate flight, and businesses involved in inversion deals had mixed reactions.
A day after the US Treasury sought to plug loopholes that encourage companies to move their tax residence offshore via takeovers of foreign firms, leading business associations said it was the wrong way to slow the departure of US companies wanting to lower their tax bills.
“Capital (Other OTC: CGHC – news) flows to places where it is valued and well-treated, and it avoids places where it is abused by onerous tax systems,” said the US Chamber of Commerce.
“The administration’s vain attempt to lock corporations into an obsolete tax system will only serve to further lock capital out.”
And the Business Roundtable, an association of chief executives of leading companies, said inversions are “a symptom of a US corporate tax system that is outdated (and) uncompetitive.”
“Unfortunately, the regulations proposed by the Treasury Department yesterday amount to a Band-Aid solution that will only make matters worse.”
Moving after Congress failed to act to stem a rising tide of inversion deals, the Treasury mainly took aim at one inversion benefit, the ability of the post-merger company to make use of profits hoarded offshore by a US company without paying US taxes on them.
“We cannot wait to address this problem,” said Treasury Secretary Jacob Lew late Monday.
“These first, targeted steps make substantial progress in constraining the creative techniques used to avoid US taxes,” he said.
– Inversions still possible –
Companies engaged in some of the more than $200 billion worth of inversion deals announced this year had mixed reactions.
Fast-food giant Burger King saying it would go ahead with its $11 billion takeover of Canada’s Tim Hortons (NYSE: THI – news) , saying moving its tax address elsewhere is not the key point.
“We are moving forward as planned. As we’ve said previously, this deal has always been driven by long-term growth and not by tax benefits,” said spokeswoman Radina Russell.
But medical device maker Medtronic (NYSE: MDT – news) , planning a $43 billion merger with Covidien (NYSE: COV – news) that would transfer its tax domicile to Ireland (Other OTC: IRLD – news) , said it was studying the new rules.
“We will release our perspective on any potential impact on our pending acquisition of Covidien following our complete review,” the company said.
Frederic Donnedieu, chairman of international tax adviser Taxand, said the move will make it harder for companies to undertake inversions, but it does not remove all the benefits.
For instance, they can still benefit simply by rebasing into jurisdictions which offer a lower corporate tax rate than the maximum 35 percent in the United States.
Donnedieu said the Treasury is nevertheless still asserting its right to tax the worldwide income of US companies, which many other countries do not do.
“With its approach towards offshore cash, the country is creating an uneven playing field and is losing out to those jurisdictions who recognize the benefits of a forward-looking tax policy,” he said.
Terry Haines, an analyst at investment research group ISI, said companies still have to wait for the Treasury to formally put its rules in place in detail.
He also suggested the Treasury could have trouble applying the new rules to inversion deals that have been announced but not yet consummated.
“Treasury also intends to catch in its net at least some already publicly announced inversion transactions. This complicates Treasury’s chances of success because aggrieved companies could mount legal challenges,” he said in a client note.
“Treasury’s actions could be found to be illegal by a reviewing court, and a court could stop Treasury from enforcing its rules.”