Int'l Tax News

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.

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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.
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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.
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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.
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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.
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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.

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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.
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Senate Finance Committee Chairman Ronwyden (D., Ore.) recently called the American tax code a "rotting mess of a carcass." The phrase captures how repugnant the current tax system has become -- and perhaps most repugnant is the U.S. tax treatment of corporate income, especially from foreign sources.
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In recent decisions, the conservative majority on the Supreme Court has made clear its view that corporations are people,with all the attendant rights. They are entitled to free speech,which in their case means spending lots of money to bend the political process to their ends. They are entitled to religious beliefs, including those that mean denying benefits to theirworkers. Up next, the right to bear arms?
There is, however, one big difference between corporate persons and the likes of you and me: On current trends,we're heading toward aworld inwhich only the human people pay taxes.
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Stephen E. Shay describes the principal tax benefits companies seek from expatriating and outlines regulatory actions that can be takenwithout legislative action to materially reduce the tax incentive to expatriate.

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In news analysis, Mindy Herzfeld discusses the proposed inversion transaction involvingwalgreens and exploreswhy corporation expatriations are becoming more difficult to accomplish.

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In economic analysis, Martin A. Sullivan discusses past proposals to limit earnings stripping and how they are relevant to the debate over corporate inversions and base erosion.

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In news analysis, Lee A. Sheppard discusses how the U.S. dual consolidated loss rules relate to the OECD's base erosion and profit-shifting action plan's recommendations on hybrid payments.

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A series of European law firms are aggressively pitching low corporate taxes in their countries to prospective U.S. clients, seeking to tap into the tax inversion frenzy that has seized Corporate America in recent months.
At least eight European law firms are pitching their services to major U.S. law firms andwall Street banks, hoping that U.S. companies considering an inversion choose Ireland, Britain or the Netherlands for their new tax domicile, according to peoplewith knowledge of the matter.
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U.S. President Barack Obama on Thursday hammered U.S. companies that avoid federal taxes by shifting their tax domiciles overseas in deals known as "inversions" and called on Congress to pass a bill to curb the practice.
During remarks to a rowdy crowd at the Los Angeles Technical College, Obama promotedwhat he called "economic patriotism" and made clear he believed the companies thatwere engaging in such practiceswere not being patriotic. The presidentwas in California on a three-day fund-raising swing for Democrats.
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President Barack Obama threw himself into the politically charged effort to block U.S. firms from reincorporating overseas for tax reasons, calling the relocations "wrong" and urging Congress to stop them through quick-fix legislation.
Such corporate relocations, known as inversions, could become awild card inwashington in the comingweeks, particularly if more big companies announce plans to move before the midterm elections in November.
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The new head of the Organization for Economic Cooperation and Development's transfer pricing unit addressed the "direction of travel" of Actions 9 and 10 of the international base erosion and profit shifting project.
Andrew Hickman,who joined the OECD on May 5, said one of the issuesworking Party No. 6 delegates are trying to make sense of iswhether tax authorities should accept the cards that the taxpayer has dealt them and play that hand accordingly, orwhether tax authorities should demand a reshuffle of the deck and start from a different point.
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As the Organization for Economic Cooperation and Development's action plan on base erosion and profit shifting considers "special measures," a U.S. Treasury official said the U.S.wouldwork hard in 2015 to ensure that the current arm's-length standard is clearly articulated and that profits are attributable to the place of economic activities.
Robert Stack, deputy assistant secretary for international tax affairs, said July 24 that the place of economic activities is "where the assets, functions and risks of the multinational are located."
Stack said the U.S. must further ensure that any "special measures" agreed to at the OECD are firmly anchored in these principles, "and that legal and contractual relationships are ignored in determining intercompany prices only in unusual circumstances."
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President Barack Obama attacked companies that use cross-border mergers to escape U.S. taxes, accusing them of being "corporate deserterswho renounce their citizenship to shield profits."

In remarks at a technical college in Los Angeles today, the president called for a new "economic patriotism" from companies. He also decried those that use corporate inversions to benefit economically by being in the U.S.while adding to the tax burden of middle-income families.

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Given a veritable flood over the last year of corporate inversions, lawmakers inwashington D.C. are debating how to respond. The arguments split, often along partisan lines, from overhauling the US corporate tax to punishing companieswho choose to move elsewhere. On July 22, Mihir A. Desai, Miuzho Financial Group Professor of Finance at Harvard Business School, testified before the US Senate Committee on Finance. His message: The answer is not in restricting the ability of firms to locatewhere it makes sense for them to be, but rather to create tax reform that makes U.S. firms more competitive.

For the testimony, go here.

Lynx Professional Grillswas launched in 1996 as a high end barbecue grill manufacturer. The company,which markets itself on sleek designs and industrial grade build-quality, is a classic old line manufacturer: a company thatworkswith steel andwelders to build heavy things that people buy and plunk down in their backyards. But it's also a digital enterprise.
In fact, Lynx's new smart grill,which is voice-activated and connects to your homewi-Fi network to access recipes and cook times and send you a textwhen it's time to flip the burgers, became the darling of this year's Consumer Electronics Show.
As I'vewritten before, the growth of the digital economy is creating some serious challenges for a system of taxation that has been largely rooted in physical supply chain touch points for a hundred years. Given that framework, how do you tax groceries that are ordered directly via your gas grill'swi-Fi connection?
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Recent cross-border merger and acquisition activity involving U.S.-based companies has garnered considerable attention. Once a cross-border merger or acquisition is being considered, one of the many optimizing decisions that must be made iswhere to locate the legal headquarters of the surviving company.
What sets the recent activity apart is that the U.S.-based companies are choosing to be taxed as foreign rather than U.S.-based companies. This has led to a growing chorus of tax experts, lawmakers and economists calling for reform of our outdated, anti-competitive tax system.
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The Obama administration is continuing to make its case for legislation thatwould retroactively strip the tax advantages away from many of the year's biggest mergers and acquisitions.
On Thursday, Mark J. Mazur, the Treasury Department's assistant secretary for tax policy, made the case that any new laws targeting inversions – transactions that allow American companies to reincorporate abroad – should be backdated to May 2014, potentially affecting a number of multibillion-dollar deals.
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Lawmakers should reduce the corporate tax rate to improve U.S. competitiveness because the current rate is a major reason for inversions, and proposals to restrict foreign ownership of U.S. corporations are "short-sighted," according to a report from Americans for Job Security released on July 21.

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President Barack Obama plans to go on the offensive against companies that use cross-borders mergers to escape U.S. taxes, accusing them of essentially renouncing their citizenship to shield profits.

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Corporate America's latest public relations disaster comes under the banner of "tax inversion." In an inversion, a U.S. company shifts its legal headquarters to a countrywith a lower tax rate. Just lastweek, the U.S. drug maker AbbVie agreed to buy a foreign firm, Shire, in part to reduce its corporate tax rate,which is expected to drop from 22 percent to 13 percent. In most inversions, companies keep their headquarters' physical activities ÔøΩ the people, the buildings ÔøΩ in the United States, aswould AbbVie. Still, the practice has understandably provoked a furious backlash.

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Nothing attests to the desperation the Obama administration faces in finding an economic meme to their liking than their claim that the recent uptick in corporate inversions represents a crisis.

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Aswith many debates inwashington these days, the latest one over corporate tax inversions is centered on thewrong question and leading policy makers to thewrong answer.
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Lawmakerswidely concerned about thewave of companies reincorporating overseas to avoid U.S. taxes split along partisan lines Tuesday overwhether any legislation should take aim at businesses that have already relocated.
It is far from clear that Congresswill take any action in response to thewave of mergers between U.S. and foreign firms, particularly in the pharmaceutical industry. But the increasing use of the practice, known as a corporate inversion, has triggered alarm on Capitol Hill. Democrats have pushed for short-term fixes, but many Republicans are reluctant to take on the issue except as part of a broader tax-system overhaul.
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The U.S. governmentwill continue a sharp focus on ensuring companies pay taxes on their overseas earnings if they develop intellectual property in the country and move it offshore, a senior Treasury tax attorney said.
"The U.S.wants to make sure thatwe get to tax properly the income earned from the IP thatwas developed in the U.S.," Douglas Poms, senior counsel for the Treasury Office of International Tax Counsel, said. He said the Internal Revenue Servicewill look at royalties on the IP to determine the tax.
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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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Republicans and Democrats are deeply divided overwhat should be done to stop companies from slashing their tax bills by moving their legal addresses outside the United States.

While both parties broadly agree the "inversion" deals threaten to drain the Treasury's coffers andweaken the U.S. tax base, they are finding little common groundwhen it comes to a legislative solution.

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Treasury Secretary Jack Lew gets one thing right in his letter to Congress on corporate "inversions": the recognition that the "bestway to address this situation is through business tax reform that lowers the corporate tax rate, broadens the tax base, closes loopholes and simplifies the tax system" ("Jack Lew's Flee America Plan," Review & Outlook, July 17). If it's the bestway, and America's business leaders certainly agree it is, thenwhy pursue an ad hoc, punitive alternative as now being proposed by the administration?

For the letter, go here.

On Tuesday, the Senate Finance Committee is scheduled to hold a hearing thatwill examine a critical issue impacting the long-term health of the U.S. economy – our international tax system. Dubbed "Love it, Leave It or Reform It!" the committee promises to delve into the specific issue of corporate tax inversions,which describes a practicewhereby companies reincorporate in a foreign country.
It is no coincidence that the hearing also takes place on the heels of U.S. Treasury Secretary Jack Lew calling for American companies to pursue so-called "economic patriotism" in their international business practices.
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As the United States continues its slow recovery from the Great Recession, a growing number of U.S. businesses are moving overseas or looking forways to move overseas in order to take advantage of more competitive tax rates. This trend, known as inversion, and the jobs thatwill certainly follow, pose a grave threat to continued economic growth.
The reason for the migration? America's corporate tax rate. Our combined federal-state corporate rate of 39.1 percent is the highest in theworld and it is accompanied by a tax system that is incredibly complex and has grown into the tens-of-thousands of pages.

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In recent months, several big U.S. companies have reached so-called inversion deals thatwill allow them to reincorporate in countries like Ireland and the Netherlands,where corporate taxes are lower.
Are these deals a sign that corporate taxes should be lowered so American companies can compete on a level playing fieldwith foreign companies, or are they an example of self-serving greed that should be outlawed so companies builtwith American support pay their fair share?

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The Joint Committee on Taxation summarized current law and the background of proposals for reforming multinational company income taxes in a July 21 report (JCX-90-14) prepared in advance of a Senate Finance Committee hearing on the topic.
The JCT report provides an overview of international tax principles in the U.S. tax system, principles of inbound and outbound taxation, and U.S. tax rules regarding inbound and outbound investment. It summarizes concerns regarding promotion of U.S. investment and expansion of home-country firms, and discusses recent actions by the OECD to prevent base erosion and profit shifting and other global activity related to taxing cross-border income.
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On Friday the U.S. drug maker AbbVie announced a plan to buy the U.K.-based Shire in a $54 billion deal, fromwhich AbbViewill emerge as a subsidiary of the U.K. firm. It is but the latest example in a flurry of acquisitions known as inversions.
The deals are driven by planning to avoid paying the U.S. tax that applieswhen firms repatriate their low-taxed foreign earnings to the U.S. This has triggered demands -- most recently, from Treasury Secretary Jack Lew -- to close down inversions through the tax code, or to deprive inverted firms of government contracts or other benefits.
Firms that invert argue that the deals are "legal," harmless to U.S. tax-revenue collection, and a necessary response to our anticompetitiveworld-wide corporate tax system. The first point is a red herring and the second demonstrably false, but there is a kernel of truth in the third.
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Much-criticized U.S. tax laws on foreign-derived income are up for discussion during a Senate Finance Committee hearing July 22,with tax-driven mergers known as inversions certain to be part of the debate.
"Critics have had a few broad, sometimes conflicting policy concerns," said a report released ahead of the hearing by the Joint Committee on Taxation, "Present Law and Background Related to Proposals to Reform the Taxation of Income of Multinational Enterprises."
The report (JCX-90-14) summarized several options for overhauling U.S. tax laws on cross-border income. Current rules provideworldwide taxation of all U.S. persons on all income,whether derived domestically or abroad, but allow deferral of U.S. taxation of much foreign business income derived by foreign subsidiaries of U.S. companies.
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Congress and corporate America are in a dangerous and mutually destructive race: The more lawmakers threaten to ban the practice of inversionsÔøΩwhere U.S. based multinationals mergewith foreign firmsto lower their tax bill– the more firms race to complete the dealswhile they can. The more deals, the more pressure on Congress to ban them.
And as themarket for inversions heats up,the odds lengthen against real reform that could address the fundamental problemwith the U.S. corporate tax system.
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When is a U.S.-based company not considered a U.S. company by the IRS?when it buys a smaller firm in a foreign country and ÔøΩ presto chango! ÔøΩ deems that company to be its parent, escaping the obligation to pay taxes to the U.S. Treasury on its foreign earnings. This process, called "inversion," is becoming increasingly popular among U.S. multinationals, drawing howls from lawmakers and the Obama administration. But a quick legislative fixwon't last long. That's because the larger problem is a uniquely flawed U.S. tax code that encourages multinationals to engage in all sorts of accounting gimmickry.

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