Tax Inversions: Treasury Department Strikes Back with New Rules

On September 22, the Treasury Department issued new rules aimed at discouraging US companies from moving their headquarters to countries with lower tax rates—the corporate inversions much in the news lately. Tax attorney Rob Wood discusses this latest government in this report.

Rob Wood

Rob Wood

Wood feels the new rules don’t solve the problem of tax inversions. They are rather complex and not easy summarize, Wood says, and they have the problem of being administrative rules rather than laws passed by Congress.

The new rules also have the problem that they are not merely prospective; they have an effect on transactions already in process. Wood says that this sort of thing has happened before, although most administrative rulemaking is prospective only. Wood says that, in the case of Medtronic, an effort is being made to comply with the new rules. The biggest effect is that the new rule will make things more difficult and expensive, but not impossible. [Note: the Medtronic inversion was the subject of an earlier LBN report.]

The rules apparently will allow inversions where the US ownership percentage is in the 60-80% range. Wood opines that one problem with the recent action by Treasury is that it more or less lets Congress off the hook and permits them to do nothing to respond to complaints. Had the new rules not been promulgated, Congress would have been pressured to act. Wood says that the tax code is a mess, but the new rules are a “rifle shot” aimed at a specific type of transaction, but this sort of approach is like to slow down any comprehensive tax code reform.

Wood suggests that the new rules are not so much a revenue measure as an effort to respond to react to public opinion about inversions. Wood says that the president has used “patriotism” in talking about these transactions, a suggestion that public opinion is the driving force here.

Wood does not know whether the new effort will lead to a reduction in corporate tax rates, but he believes they should be lowered. One thing militating against the lowering of corporate tax rates is the feeling that it is wrong for big corporations to be taxed at a lower rate than individuals. However, Wood notes, our two-tiered tax system imposes taxes on corporations as well as taxes on shareholders, and salaries paid to corporate employees.

For more information on the subject, please refer to Mr. Wood’s article in Forbes. Robert Wood is a tax attorney with Wood, LLP in San Francisco, California and spoke with The Tax Law Channel, an affiliate of The Legal Broadcast Network.  The Legal Broadcast Network is a featured network of the Sequence Media Group

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