Int'l Tax News

Most offshore countries saw increases in new business incorporations in the second half of 2013, a reflection of their favorable corporate tax policies, according to a report from a consulting firm for offshore corporations.
The report, released Aug. 14 by Appleby Global Group Services Ltd., said new registrations grew from 5 percent to 10 percent in most countries as the global economy continued to recover. However, overall new registrations slid due to a decline in the British Virgin Islands, by far the biggest destination for offshore incorporations.
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U.S. Sen. Chris Coons took exception Sundaywith U.S.-based companies that reincorporate outside of the country in pursuit of tax savings, saying executives that authorize so-called tax inversions "are not following their duty as Americans."
Coons, a Delaware Democrat, appeared on Fox News Sunday alongside John Engler, president of the Business Roundtable, an association of top chief executives, to discuss a spike in inversions,which has rankled officials inwashington and in Delaware,where the state budget relies heavily on corporate revenue.
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Senate Finance Committee Chair Ronwyden, D-Ore., said August 14 he hopes to have in place by September bipartisan anti-inversion legislation that includes a proposal to address earnings stripping -- comments coming just hours after a Democratic senator released details of a plan to do so.
Finance Committee member Charles E. Schumer, D-N.Y., released the details of a proposal that targets earnings stripping by placing limits on inverted companies' ability to claim the interest expense deduction. The plan is still being drafted into legislation,which Schumerwill officially introduce after the Senate returns in September, an aide said.
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Sen. Charles E. Schumer (D-N.Y.) launched a new attack on corporate inversions but appeared to hit a headwind from Senate Finance Committee Chairman Ronwyden (D-Ore.).
Schumer outlinedwhat he called a Democratic proposal Aug. 14 to curb companies' ability to transfer foreign debt to their U.S. operations to receive more favorable tax treatment, a practice known as earnings stripping.wyden respondedwith a statement saying he continues to seek a bipartisan solutionwith the committee's ranking member, Sen. Orrin Hatch (R-Utah).
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Sen. Charles Schumer (N.Y.) on Thursday took aim at a tax break used by companies that reincorporate abroad, as Democrats ramped up their populist campaign against "corporate deserters."

Schumer's measure seeks to roll back a practice known as "earnings stripping,"which allows U.S. subsidiaries to take a tax deduction on interest payments after receiving a loan from their foreign parent.

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Senate Finance Committee Chairman Ronwyden, D-Ore., issued a statement today regarding congressional proposals to close the inversion loophole.
"This issue demands a resolution in the near term and I hope to have bipartisan legislation in place come September."
For the statement, go here.

According to much conventionalwisdom, the flap over corporate "tax inversions" is just the latest evidence that the tax code needs a comprehensive overhaul like the one agreed to by congressional leaders and President Reagan in 1986.

Whether you consider it greedy and unpatriotic for U.S. companies to establish corporate headquarters in lower-tax foreign countries, or merely regrettable but rational, part of the solution is to lower that rate and recoup lost revenue by closing loopholes, it is said.

"Lower rates, broader base"was the cardinal principle of the 1986 reform. And it is still the mantra of tax reformers today. There's just one problem: In 2014, the 1986 model looks like "a dead end." Or so argues Michael J. Graetz, a former Treasury official in the first Bush administration and longtime advocate of radical tax reformwho teaches at Columbia Law School.

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Senator Charles Schumer released a proposal today thatwould limit deductions available for U.S. companies that take a foreign address to reduce their taxes.
Schumer, a New York Democrat,wants to curb a practice known as "earnings stripping," inwhich companies that engage in inversion transactions then load up their U.S. operationswith debt and reduce their U.S. taxable income.
Schumer's plan may become part of a broader effort by Democratic lawmakers to curb inversions,which faces major hurdles before it can become law.
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Thewave of corporations seeking to "invert," or reincorporate as offshore companies, requires action. But lobbyists' preferred solution, reducing our corporate tax rate,will not solve this problem.

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For the last severalweeks, President Obama, politicians,washington insiders and some in the media have filled the airwaveswith inflammatory rhetoric about "inversion" transactions, inwhich U.S. companies reincorporate overseas. They suggest that such companies are "unpatriotic" and "corporate deserters" ÔøΩ serious charges to level against companies that, even after inverting,will employ tens of thousands of Americans, play a vital role in the U.S. economy and pay significant taxes on U.S. income.
As the executive chairman of one of those companies, I've been stunned by thewillingness of politicians to choose easy political sound bites over trying to solve the real issue.
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Inversions are not new. Inversions reduce U.S. taxes onforeignincomeÔøΩnoton U.S. based income.Yet in a short period they have undergone a startling metamorphosis.
Once theywere interesting transactions for a few companieswith the right facts and international ambitions.Then almost out of the blue, these deals became one of the hottest trends in years. Equally suddenly, inversionsÔøΩand those perpetrating themÔøΩbecame pariahs.
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President Obama and legislators are embroiled in a debate overwhether and how to punish companies that seek U.S. tax relief by buying a smaller foreign company and legally reincorporating in its country. So-called tax inversions are at a record high, and Obama has suggested it's not a victimless activity. "It's not right," he said on August 6. "The lost revenue to Treasury means it has got to be made up somewhere, and that typically is going to be a bunch of hard-working Americans,who either pay through higher taxes themselves" or cuts to government services.
The inversion debate is a sign of unhappinesswith U.S. corporate tax rates,which are the highest in the developedworld and tempting companies to jump overseas in the first place. And fixing the tax code, by reducing those onerous rates and plugging loopholes, requires the government to find some new sources of income elsewhere. Enter federal climate policy,which for years now has been held up as a potential funding source forwhatever anyone needs at the moment. Two environmental economists propose that federal income from a carbon tax could help reboot the U.S. corporate tax code. And a rebooted corporate tax codewould then have the effect of reducing the cost of the carbon tax to GDP.
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In an August 13 letter to President Obama, several House and Senate Democrats urge executive action on inversions.
For the letter, go here.

Samuel Thompson Jr. of Penn State Law has expressed support for legislation and administrative actions to curtail corporate inversions and related transactions, specifically endorsing a proposal to issue regulations under section 385 thatwould target artificial debt instruments issued by a U.S. corporation to its new foreign parent.

For the letter to Treasury, go here.

U.S. companies are looking for all sorts ofways to reduce their tax bill. But scores of big U.S. companies just paid no taxes or effective tax rates of 0%.

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Political heat has intensified on tax "inversions" after awave of cross-border mergers and acquisitions. A tax inversion occurswhen a U.S.-headquartered firm acquires or mergeswith a smaller global firm, but the headquarters are located in the acquired firm's country because of tax considerations. Obviously, this is a tax policy issue. So it is telling that Democrats in the House and Senate introduced legislation to prevent inverted companies from receiving government contracts, instead of dealingwith the tax policy issue. Clearly, this signals that Democrats are only interested in playing politics, not fixing the problem.
What should they be doing?
For the article, go here.

Jeffery Kadet of the University ofwashington School of Law has suggested to Treasury two proposals for eliminating the economic incentives that encourage corporate inversions, neither ofwhichwould require Congress to pass legislation.

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Proposals for anti-expatriation legislation, such as restrictions on interest expense deductions and limitations on management and control, could discourage foreign direct investment in the United States, the Organization for International Investmentwarned the Senate Finance Committee in an August 5 letter.

For the letter, go here.

Michael L. Schler discusses technical and policy issues, aswell as unexpected results, that arise under the OECD's proposals to eliminate mismatches of income and deduction resulting from hybrid instruments and hybrid entities.
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President Barack Obama is facing increasing pressure to bypass Congress and act on corporate inversions unilaterallyÔøΩbut many tax experts believe the administrationwould be on shaky ground in doing so.
"The arguments for Treasury regulation are based on laudable policy instincts,which I share," said Edward Kleinbard, a professor of law at the University of Southern California, and former chief of staff of the U.S. Congress's Joint Committee on Taxation. "But they are very strained readings of the relevant regulatory authority." In fact, he said, those arguments are so strained that theywould do more harm than good to "Treasury's ongoing relationshipwith Congress, and its ability to take courageous stands through regulation in the future."
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The steady rise in U.S. corporations buying foreign companies and then moving their headquarters abroad is not personal, it's just business.
It reflects the increasingly obvious fact that America's high corporate tax rates put our companies at a competitive disadvantage against foreign companies, especiallywhen competing for global markets. Yet a number of commentators have tried to make it personal.
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A group of accountants said Friday that they're tired of being blamed by President Obama for a rash of new offshore tax deals.

Scott Adair, president of the New York State Society of Certified Public Accountants, said that Obama should be looking closer to home if hewas seeking to hold someone responsible for so-called corporate inversions.
"If President Obamawants to point fingers, perhaps he should point them at Congress for creating the very loopholes he vilifies. Sustainable corporate tax reform is the elephant in this room," Adair said in a statement.
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The recentwave of corporate tax inversions has triggered interest inwhat motivates these tax-driven transactions now. Corporate executives have argued that inversions are explained by an "anti-competitive" U.S. tax environment, as evidenced by the federal corporate tax statutory rate,which is high by international standards, and by its "worldwide" tax base. This paper explainswhy this competitiveness narrative is largely fact-free, in part by using one recent articulation of that narrative (by Emerson Electric Co.'s former vice-chairman) as a case study.

For the paper, go here.

Corporations now have toweigh much more than just their tax billwhen decidingwhether to shift their legal addresses overseas.

President Obama thisweek vowed to curb the influx of companies buying smaller foreign competitors to slash their tax bill through a corporate "inversion," just the latest sign that an issue little-known outside the taxworld a few short months ago has evolved into potent political fodder.

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U.S. companies thatwant to lower tax bills by moving their legal address overseas have bulked up their lobbying efforts since April as the Obama administration and some lawmakers seek to curb the practice.
In total, nine companies that have sought cross-border mergers, are considering doing so or are targets of such deals have begun lobbying on legislation to stop the practice, federal disclosure reports show.

"There are a lot of reasonswhy tax reform is stuck in Congress, and one of them is because big companieswith vested interestswant it to be stuck," said Adam Rappaport, a senior counsel at Citizens for Responsibility and Ethics inwashington.

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J.D. Foster, deputy chief economist at the U.S. Chamber of Commerce, points out that merger transactions resulting in a foreign-domiciled business are a real and consequential symptom of serious flaws in the U.S. tax system.
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Forwhat appears to be the first time since the statutewas enacted in 2004, the IRS has issued a private letter ruling (LTR 201432002) applying the section 7874 anti-inversion rules to a set of taxpayer facts, concluding in the taxpayer's favor that the proposed transactionwon't trigger inversion gain.
Although the ruling is a first, it's not particularly surprising and doesn't touch on the kinds of inversion transactions in the news lately.
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What has prompted the current inversion trend? A change in U.S. law is not the reason. Section 7874,which attempts to restrict U.S. companies from expatriating overseas, has existed unchanged for over 10 years. Instead, thewave of inversions may be explained by a complex and interacting set of factors, including tax competition, increased foreign earnings, and decreasing reputational risk forwould-be inverters.

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Over the past few months, many companies have responded to our overly burdensome corporate tax system by re-domiciling their headquarters overseas. Such moves leave the United Stateswith a smaller tax base that results in many billions of dollars in lost revenue. Clearly, this is a cause for concern, and, unfortunately, it is unlikely to go away anytime soon.
Despite this grim reality, however, every Democratic proposal offered so far to deter such action has been purely political.what's more, these proposals contain punitive and retroactive provisions thatwould exacerbate the problem.
For the op-ed, go here.

The Obama administration is exploring a range of possibleweapons in the tax code to try to deter companies from relocating overseas for tax purposes through so-called inversion mergers.
Each potential change comeswith its own potential pitfalls and risks, and no decisions have been made. Meantime, lawyers and bankers are busy doing their own homework in order to gauge how any changes might hurt existing or proposed corporate deals.
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If the Treasury Departmentwas trying to scare investors away from corporate inversions by saying the U.S.would examineways to stop the deals, itworked.
Stock markets punished companies pursuing inversions on Aug. 6 and investors have genuine reason for concern about the prospects for cross-border mergers that limit U.S. corporate taxes.
The policy landscape on inversions has shifted significantly since lastweek,when U.S. lawmakersÔøΩdeadlocked on tax policyÔøΩleftwashington for a five-week break.

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The corporate income tax rate in Japan is known to be one of the highestworldwide. To encourage foreign companies to do business in Japan and make the country a more attractive location for investments, Prime Minister Shinzo Abe is considering reducing the corporate income tax rate to a "competitive rate in the global market".
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Between 1983 and 2004 therewere 29 inversion transactions out of the US. In the decade following, almost 50 companies restructured using the method.whatever the motivation, inversions are in vogue. ITR's special report looks at the knock-on impacts of the currentwave of inversions, including shareholder pressure to consider an option they see their rivals pursuing and the possible inflammation of the tax morality debate in the US.
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The U.S. corporate tax system is broken.
Recent efforts by major corporations to mergewith smaller foreign firms and move their corporate residence overseas to reduce their U.S. tax liability have sparked outrage and prompted proposals to curb such transactions.
Tax avoidance by U.S. corporations, however, is not limited to thosewho migrate overseas. Congressional hearings earlier this year highlighted efforts by major U.S. firms to avoid taxes by shifting their reported profits to affiliates in low-tax countries.
Policy makers and expertswidely agree that current proposals to limit corporate expatriations are only a stopgap and that broader reforms are needed. President Barack Obama and Rep. David Camp, the Republican chairman of the Houseways & Means Committee, among others, have proposed cutting the corporate tax rate and eliminating tax breaks that help many firms avoid tax.
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Three prominent Democratic senators on Tuesday urged President Barack Obama to use his executive authority to reduce or eliminate tax breaks for companies that shift their headquarters overseas to cut their U.S. tax bills.
"Althoughwewill continue towork toward a legislative solution to the problem,we urge you to use your authority to reduce or eliminate tax breaks associatedwith inversions," the senatorswrote in a letter to the president.
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On July 3, 2014, New Zealand's Revenue Minister Todd McClay revealed that the OECD has agreed the final recommendations for the first set of actions to tackle base erosion and profit shifting (BEPS) by multinational enterprises,which are due to be finalised in September. So as the BEPS project approaches a crucial juncture, this feature summarises key developments in its brief history and other issueswhich could have a major bearing on its outcome.
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The administration and Congressional Democrats have signaled their intention to make corporate flight from the U.S. a populist issue in the run-up to the mid-term elections. The Democrats' policy prescriptions for these redomiciliations or "inversions" threaten to cost U.S. jobs and ignore the underlying flaws in the tax code that drive many of these overseas transactions. As tax policy, the anti-inversion proposals advanced by the administration and certain Congressional Democrats are flawed, and as budget policy, they areweaker still.

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There is almost no one left in officialwashingtonwho doesn't think something should be done about inversions. But there is a lot of variety in the solutions being proposed,which makes consensus almost impossible.

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The Obama administration has broad legal authority to stop corporate inversions.
The dispute boils down to law versus politics.
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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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