2014

Just four short years ago, the OECD resoundingly reaffirmed its commitment to the arm's-length principle and all seemedwell in theworld of transfer pricing. Fast forward to 2014,where BEPSdominates the
international tax landscape, and suddenly the arm's-length principle is "under assault" and the transfer pricingworld stands on the verge of "international tax chaos."The BEPS Action Plan notes certain "flaws" in the arm's-length principle, and contemplates "special measures, eitherwithin or beyond the arm's length principle," in order to address issueswith respect to "intangible assets, risk and over-capitalisation." Nothing is taboo, and OECD officials now openly discuss the possibility that the organization may approve new transfer pricing rules inconsistentwith the arm's-length principle.

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Talk of cracking down on U.S. corporations that move offshore is making some other companies nervous -- notably, foreign-owned concerns,which arewarning of cuts to their U.S. employment or investment if they're caught in the cross hairs.
The Organization for International Investment, a trade group of U.S. subsidiaries of big foreign multinationals, told lawmakers in a letter Tuesday that legislative efforts to limit so-called inversions by U.S. companies could hit its members aswell. And, the foreign firms said, so could potential regulatory action by the Obama administration.
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Every loophole has its lover.
That'swhy, despite the furor that has erupted over American companies adopting foreign headquarters to reduce their taxes, it is proving so difficult to fix a corporate tax system that most everyone agrees is badly broken.
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Given the risks and uncertainties inherent in inversion transactions and the number of factors at play in determining a company's effective tax rate, the headline-making tax rate declines promised by inverting U.S. multinationals can seem too good to be true. But an examination of companies involved in deals announced just a few years ago suggests that the move can pay off even in the short term.
A multinational's effective tax rate is influenced by numerous factors, both internal and external. A primary factor is a business's performance, according to Kevin M. Johnson of Pepper Hamilton LLP. "Future tax benefits are projected based on some kind of earnings projections, so if business circumstances change, if earnings are higher or lower, that could affect the rate," Johnson said.
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Walgreen Co., the biggest U.S. drugstore chain, said it plans to buy all of Alliance Boots for about $15.3 billion andwon't use the deal to move its tax address abroad.
"A potential tax inversion has become a hot button topic in recentweeks as the company and a handful of outspoken investors haveweighed the option," said Ross Muken, an analystwith ISI Group LLC, in a note to clients before the dealwas announced. Moving overseas could have savedwalgreen at least $4 billion in taxes over five years, he said.
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We have met the enemy and he is us. Yesterday, in a series of hits as operatic and brutal as the last 15 minutes of the Godfather, the government effectively made inversion through corporate merger an offense punishable by corporate death.
Using the threat of an unlimited Treasury investigation, the President and Senator Dick Durbin stoppedwalgreen from moving to Switzerland. Thewreckage of some $10 billion in lost stock value for mostly Main Street investorswas left as a grim reminder not to cross the government by, in this case, following the letter of our own stupid laws.
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Treasury is exploring options for administrative actions to limit the ability of companies to invert and to reduce tax benefits for inverted companies, a Treasury spokesperson confirmed to Tax Analysts August 5.
Treasury Secretary Jacob Lew last month called on Congress to immediately pass legislation thatwould retroactively address inversions, but argued that tax reform remains the best long-term solution. Lew stands by that call because there are limits towhat Treasury can dowithout congressional action, the spokesperson said. "Nonetheless, Treasury is reviewing a broad range of authorities for possible administrative actions that could limit the ability of companies to engage in inversions, aswell as approaches that could meaningfully reduce the tax benefits after inversions take place, to at least provide a partial fix," the spokesperson added.
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Washington policymakers are bracing for awave of corporations to renounce their U.S. citizenship over the next few months, depriving the federal government of billions of dollars in tax revenue and stoking public outrage ahead of the Nov. 4 congressional elections.
So far this year, about a dozen U.S. companies - including suchwell-known brands as Medtronic medical devices and Chiquita bananas - have mergedwith foreign firms and shifted their headquarters offshore to avoid U.S. taxes, analysts say.
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The Obama administration isweighing plans to circumvent Congress and act on its own to curtail tax benefits for United States companies that relocate overseas to lower their tax bills, seeking to stanch a recentwave of so-called corporate inversions, Treasury Secretary Jacob J. Lew said on Tuesday.
Treasury Department officials are rushing to assemble an array of options thatwould essentiallywipe out the economic incentive for the deals, Mr. Lew said. No final decision has been made.
''The question is, Canwe do enough that itwill materially change the economics of inversions so that companieswill make different decisions?'' Mr. Lew said in an interview. ''The thingswe are looking at look to me like they could very materially change the economics of inversions.''
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Eighty-six percent of Democrats, 80 percent of independents, and 69 percent of Republicans disapprove of corporate inversions, according to a poll of likely voters, Americans for Tax Fairness said in an August 5 release.

For the release, go here.

President Barack Obama just might find away to use the power of his pen to slow the pace of tax-driven corporate mergers called inversions.
Afterweeks ofwaffling overwhether the administration has the power to sidestep Congress, Treasury Secretary Jacob J. Lew is exploring possibilities. Obama and Lew stillwant legislation to halt such deals, inwhich U.S.-based companies combinewith foreign companies in less-expensive tax jurisdictions to trim their tax obligations, but a stopgap could be coming in the meantime.
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A request for input has been released today to invite public commentson BEPS Action 11 regardingwork on establishing methodologies to collect and analyse data on BEPS and the actions to address it.
In July 2013, the OECD published its Action Plan on Base Erosion and Profit Shifting. The Action Plan identifies 15 actions to address BEPS in a comprehensive manner and sets deadlines to implement these actions.
The Action Plan also provided that "[t]he OECD'swork on the different items of the Action Planwill continue to include a transparent and inclusive consultation process" and that all stakeholders such as business, labour, non-governmental organisations, think tanks, and academiawould be consulted.
As part of that consultation process, interested parties are invited to send comments on this request for inputwhich should be submitted electronically (inword format) before 5.00pm on 19 September 2014 (no extensionwill be granted) to CTP.TPS@oecd.org.
For the request, go here.

"It ain't right," says President Barack Obama. American companieswho dodge the taxman by mergingwith overseas rivals are "renouncing their U.S. citizenship" and should be branded "corporate deserters," he says. And in name of "economic patriotism," Obamawants Congress to quickly close the corporate "inversion" loophole so these Benedict Arnold multinationals keep paying their fair share to Uncle Sam.
But patriotism, at least of the superficial sort, and business don't mix. For example, after the 9/11 terror attacks, investorswondered if therewould be a "patriots rally" once the New York Stock Exchange reopened.well, therewasn't. Instead, the Dow Jones Industrial Average fell by more than 7 percent on Sept. 18, 2001, one of largest one-day declines inwall Street history.with fear of new attacks running high, therewas little incentive for investors to stay in the market ÔøΩ even though itwould have been the "patriotic" thing to do.
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Work on international tax rules and guidance to address base erosion and profit shifting should take into account difficulties that developing countries have getting access to tax information from multinational companies, according to a new report by the Organization for Economic Cooperation and Development.
The report, released Aug. 1, summarizes key OECD findingsÔøΩfor example, that lack of information often hinders these countries' ability to effectively respond to BEPS.
For the story, go here.

As far as tax loopholes go, "inversion" has officially made it into the big leagues.
The once obscure practice has been thrust into the spotlight by the President (who called inversions "unpatriotic"); Jon Stewart (who said the practicewas equivalent to "gender reassignment" for corporations); and Steven Colbert ("it's like me adopting an African child, then claiming myself as his dependent.")
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Any time is a bad time to try ginning up popular enthusiasm for a corporate tax cut.
Now is especially bad. Stock values are bursting through the ceiling and companies are hoarding cash. Few American firms are hiring. Not an ideal atmosphere for considering the best interests of big companies.
But to stem the current trend of American companies moving their headquarters overseas ÔøΩ a practice known as an "inversion" ÔøΩ tax reform that includes lower corporate taxes is exactlywhat is needed.
For the editorial, go here.

It's both endearing and infuriating towatch American corporate executiveswring their hands about how the injustices of the U.S. tax code are forcing them ÔøΩ forcing them! ÔøΩ to reincorporate overseas through the procedure known as inversion.
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The Institute for Policy Innovation on July 31 published an article positing that tax reform, rather than imposition of penalties and capital controls, is key to reducing corporate inversions among U.S. companies.

For the article, go here.

One campaign 2014 kerfuffle concerns the previously arcane issue of "inversion," the process bywhich a U.S. corporation mergeswith a foreign one so as to pay taxes at the other country's lower rates. If ever a tax loopholewere designed to provoke inflammatory rhetoric, this is it. Senate Finance Committee Chairman Ronwyden (D-Ore.) labeled a recentwave of corporate reflaggings a "plague"; Treasury Secretary Jacob J. Lew took to The Post's op-ed page to demand "economic patriotism." For their part, Republicans are playing this as a simple story of corporate escape from the allegedly oppressive U.S. corporate tax rate.
For the editorial, go here.

There has been little interest in Congress in the OECD's base erosion and profit-shifting project. Lawmakers' relative indifference toward the BEPS recommendations, the firstwave ofwhich is due in September, is typical of the general antipathy toward major tax changes. That indifference might change once the recommendations are released, because Congresswill need to be involved in at least some aspects of their implementation in the United States.
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In the press and on Capitol Hill, the conventionalwisdom is that inversions occur because Congress has failed to enact tax reform. The United States has a high corporate tax rate and aworldwide system. Foreign countries have lower corporate tax rates and territorial systems. If the United States lowers its rate and adopts a territorial system, the incentive to invertwould be removed, right?
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In response to section 7874 and the increasingly broad interpretation of the statute by the IRS, inversion transactions have begun to take new forms and rely on more aggressive interpretations of the code. The resulting increase in both the types and the complexity of inversion transactions has fueled public debate and put pressure on Congress to try to prevent even more corporations from fleeing U.S. shores.
It is important to look at the details of the inversions that have happened or are being contemplated in 2014 to see the trends that have emerged.
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Rep. Sander Levin (D-Mich.)will propose legislation to fight corporate inversions by curbing earnings stripping, according to a draft bill circulating among tax lobbyists.
The draft bill by the ranking member of the Houseways and Means Committee, called the Stop Corporate Earnings Stripping Act,would combat earnings stripping by repealing the debt-to-equity safe harbor under tax code Section 163(j) and reducing the permitted net interest expense to no more than 25 percent of the entity's adjusted taxable income, according to a summary of the draft.
In addition, the actwould repeal the excess limitation carryforward, but permit any disallowed interest expense to be carried forward for five years, the summary says.

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As far as tax loopholes go, "inversion" has officially made it into the big leagues.
The once obscure practice has been thrust into the spotlight by the President (who called inversions "unpatriotic"); Jon Stewart (who said the practicewas equivalent to "gender reassignment" for corporations); and Steven Colbert ("it's like me adopting an African child, then claiming myself as his dependent.")
For the story, go here.

Our out-of-date tax code is turning American businesses into economic refugees. In the last five years alone, over thirty-five American companies have inverted, buying smaller foreign firmsÔøΩoften for more than they areworthÔøΩand moving their headquarters overseas.whywould they do such a thing? Usually it's to escape a broken, inefficient tax code that lags far behind those of our competitors around theworld.
For the story, go here.

In May 2013, Applewas one of several US multinationals in the hot seat before a bipartisan US senate subcommittee investigating the use of corporate tax avoidance schemes.
Apple's tax arrangements in Ireland made international headlines, as Apple chief executive Tim Cook revealed that the company paid a sixth of Ireland's multinational tax rate of 12.5 per cent.
The Irish Governmentwas quick to deny assertions that itwas providing a "tax haven" to such companies.
For the story, go here.

The last several months have seen awave of American companies mergingwith foreign companies, a process known as "inverting." In effect, inversion is the corporate equivalent of a renunciation of American citizenship. By some estimates, about $250 billion of these deals have been consummated since the start of the year, and another $100 billion could be finalized soon.
As inversions have exploded onto the policy scene,washington is scrambling to findways to counteract a trend that could deprive the federal treasury of tens of billions of tax dollars,whichwashington believes belong to the government. In President Obama's ownwords, "My attitude is I don't care if it's legal, it'swrong."
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Lowering the corporate tax ratewon't stop companies from seeking even lower taxes by moving overseas, Rep. Sander Levin, D-Mich., told CNBCwednesday.
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From the perspective of U.S. multinationals, foreign tax authorities are taking more aggressive transfer pricing positions that aren't in accordancewith the arm's-length principle, making it more difficult to resolve cases, David Canale said July 31 during awebcast conducted by EY practitioners.
Historically, disputes involving U.S.-initiated transfer pricing adjustmentswere often resolved at the examination level, but in the last few years, the ability for taxpayers to obtain relief at that level has diminished, Canale said.
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International Tax News is designed to help multinational organisations keep upwith the constant flow of international tax developmentsworldwide. Among the topics featured in this month's edition are:

• Approval by the US House of Representatives of permanent extension of the research credit
• Brazilian Superior Court of Justice finds international tax treaties should prevail over Brazilian CFC rules
• China solicits public opinion on discussion draft of Administrative measures on the General Anti-Avoidance Rule
• The Hong Kong - Korea double tax treaty signed

For this month's edition, go here.

Ireland is in the firing line fromwashington again for luring U.S. companies to its shores for tax benefits, but despite contrite noises coming from Dublin, it has too much to lose to discourage U.S. firms bent on shifting their tax domiciles.
The surge in such deals,which are typically effected by purchasing an overseas company -which does not then necessarily create any new jobs - drew the ire of President Barack Obama lastweek,who singled out Ireland for criticism.
For the story, go here.

President Obama and many congressional Democrats argue that U.S.-based multinational firms are being unpatriotic by moving their corporate addresses overseas in order to reduce their taxes. Obama even implied they are "corporate deserters." These are powerful, emotionally-charged allegations. But are they fair?
Is it unpatriotic to maximize tax savings? After all, companies and individuals do itall the time. Or is it only unpatriotic to reduce taxes by shifting your legal headquarters to a low-tax country?
For the story, go here.

Consensus on Capitol Hill remains fleeting over how to address tax-driven corporate mergers called inversions despite a mounting chorus for some sort of solution. More than a dozen such deals have been completed or announced this year and another 25 could happen before the end of 2014, further eroding the U.S. tax base,warns Senate Finance Committee Chairmanwyden.

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Lawmakers seeking to stop a flood of potential inversion deals are starting to express interest in legislation thatwould discourage earnings stripping,with the taxwriting committee chairs agreeing that it'sworth considering and a senior Democratic senatorworking on a bill to limit interest deductions.
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Getting a foreign address isn't the onlyway American companies are skirting corporate income taxes.
Even as President Barack Obama calls for rules to stop companies from ditching tax bills by reincorporating abroad, the byzantine U.S. tax code is offering new techniques to escape the highest corporate rate in the developedworld.
Companies are finding all kinds ofways to escape America's 35 percent corporate rate, from acquiring a mailbox in Ireland to using a 54-year-old tax break originally meant to allow middle-class people to invest in real estate.
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Herman Bouma of Buchanan Ingersoll & Rooneywrites that the greatest impediment to a rational international tax system is the "obsession" among tax policy makerswith assigning residency to corporations. He faults the OECD's treatment of the corporate use of tax havens as a transfer pricing problem, instead advocating adoption ofworldwide formulary apportionment.

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Ireland does not promote or encourage tax inversion by US multinationals, and is chosen by a "small number" of firms each year because of a combination of non-tax and tax perks, Ireland's Minister for Jobs, Richard Bruton, has said.
He said neither the Government, nor his Department, nor the country's enterprise agency advocates that companies "engage in any practiceswhich bring little or no substance in terms of jobs or economic activity to Ireland."
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One of theworst things aboutworking inwashington is that it's so easy to get frustrated about the fact-free nature of political debates.
For instance, there's now a big controversy about companies "re-domiciling" or "inverting" from the United States to lower-tax nations such as Ireland and Switzerland.
This should not be controversial. Unless, of course, you think businesses shouldn't be allowed to move from California to Texas. Or from New York to Tennessee.
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It's time to reform the U.S. tax system. Democrats think so. Republicans think so. Sowhat is the rightway to do it? This iswhere disagreement starts, and it's the reasonwe are stuckwith a system thatworks for no one. The current tax system doesn'twork for businesses and it doesn'twork forworkers.

For the story, go here.

So far this year 14 companies have announced plans to mergewith foreign companies or relocate overseas to lower their tax bills and increase their ability to compete internationally. Calls for economic patriotism are not going to stop these "inversions." The U.S. has the developedworld's highest corporate tax rate, and it taxes operations overseas differently than our competitors do; that'swhat is driving our companies away.
Instead of punishing companies for moving abroad,we should be creating an environment inwhich they can succeed.
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Democrats believe tax reformwon't come fast enough to stop the newwave of inversions. And Republicans don't like the proposals by the Obama administration or by congressional Democrats to expand the foreign ownership requirements necessary to allow a corporation to expatriate. But that doesn't mean there is no common ground onwhich the two parties can come together to significantly slow the pace of inversions.
For the story, go here.

Those practicing in the international tax area have heard much over the last two years about the Organization for Economic Cooperation and Development's efforts to combat base erosion and profit shifting (BEPS).
The global spread of BEPS in recent decades has effectively nullified, at least in part, corporate tax regimes in countries around theworld. Some policy makers maywelcome a reduction in the corporate tax burden as away to stimulate business investment. For developing countries, however, investment stimulus from aweakened operation of the corporate tax laws comes at a relatively high price.
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When companies are heading for the door as fast as they decently can, you have to ask yourselfwhy? President Obama's approach is a rather different one; let's just lock the door and stop them from leaving.
On both sides of the US political divide, America's apparent corporate exodus via so-called "inversion takeovers" is a source of growing concern. However, their response to the problem could hardly be more different.
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A trustyway towin in backyard baseball is to change the rules retroactively. Redraw the first base line so a home run becomes a foul ball. After a third missed swing, declare that little kids get four strikes. Announce that a ball hit into the neighbor's yard is an automatic out.
The Obama Administration and congressional Democrats are pushing their own equally dubious version of retroactive rule-making. Theywant to limit the ability of companies to escape U.S. taxation by mergingwith foreign companiesÔøΩand theywant to make the change retroactive to May 8. If they succeed, itwouldapply tocompanies such as Medtronic (MDT)and AbbVie (ABBV)which have pending mergers.
These mergers, known as corporate inversions, are a huge drain on the U.S. Treasury, and finding away to stop them as soon as possible makes sense. Eachweek that goes bywithout a fix makes mattersworse as more and more companies strike tax-minimizing merger deals. But yanking the tax advantage from deals that have already been lawfully agreed to is a toxic kind of unfairness, even if it's lawful.
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The late Senator Russell Long of Louisiana,who served many years as chairman of the Senate Finance Committee, gave a classic rationale for tax policy: "Don't tax you, don't tax me, tax that fellow behind the tree."
The Obama administration is making a mighty fuss about the perceived evils of tax inversions -- the process bywhich U.S. corporations relocate to tax-friendlier places, such as the United Kingdom or Ireland, by mergingwith a foreign company. The U.S. corporations thus become British or Irish for tax purposes.
This is a serious issue but Obama's call for "economic patriotism" alongwith the absence of anything resembling a coherent reform plan makes it clear that politics -- not economics -- is the real issue on the table.
For the story, go here.

You know a government must be starving for fundswhen it starts identifying taxation as a form of "economic patriotism." That iswhat U.S. Treasury Jacob Lew saidwhen he urged Congress to pass legislation to curb U.S. corporations moving their residence abroad to avoid paying federal corporate taxes.

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The U.S. Treasury Department should use immediate stopgap regulations to make offshore transactions known as corporate inversions less lucrative, said the department's former top international tax lawyer.
The administration can unilaterally limit inverted companies from taking interest deductions in the U.S. or from accessing their foreign cashwithout paying U.S. taxes, Stephen Shay said in an interview and in an article published today in Tax Notes.
For the story, go here.

Sometimes even journalists get it right. My essay about companies incorporating overseas to dodge taxes clearly struck a nerve. Since its publication earlier this month, these corporate "inversions" - a euphemism for "desertions" - have taken on a life of their own.
What to do? In an idealworld, Iwould slap serious penalties on inverters that do businesswith the federal government and require them to underbid genuinely U.S. competitors to get federal business. Medtronic andwalgreen, that means you.
For the story, go here.

Economic refugees have traditionally lined up to get into America. Lately, they have been lining up to leave.
Inwashington, DC, policymakers have reactedwith indignation. Jack Lew, the treasury secretary, has questioned the companies' patriotism and called on Congress to outlaw such transactions. His fellow Democrats are eager to oblige, and some Republicans arewilling to listen.
The proposals are misguided. Tightening the rules on corporate "inversions", as these moves are called, does nothing to dealwith the reasonwhy so many firmswant to leave: America has the richworld's most dysfunctional corporate-tax system. It needs fundamental reform, not new complications.

For the article, go here.

Sincewe last overhauled our federal tax code, in 1986, countries around theworld have lowered their tax rates, leaving the United Stateswith the highest corporate tax rate in the developedworld. At the same time, the system has become full of inefficiencies and special-interest loopholes. That iswhy it is so important thatwe reform our business tax code to make the U.S. economy more competitive and to accelerate economic growth and job creation. Taking this stepwill make the United States an even more attractive place to do business and ensure that capital and talent are allocated more efficiently in pursuit of high economic returns, rather than low tax bills.
But one particular tax loophole has become increasingly urgent to address: the fact that the law rewards U.S. corporationswith substantial tax benefitswhen they buy foreign companies and declare that they are based overseas.
For the article, go here.