Treasury announces more guidance on offshore tax deals

The Treasury Department on Monday announced additional actions that it is taking to curb offshore tax deals known as corporate inversions.

Inversions are transactions in which U.S. companies change their legal residence to lower their tax burden. Planned inversions by Pfizer and Johnson Controls have received attention from members of Congress and presidential candidates.

{mosads}Treasury issued proposed regulations that would address a tax-avoidance strategy that inverted companies often use called “earnings stripping.” This strategy is when U.S. subsidiaries of inverted companies issue debt to their foreign parents as dividend distributions and then get a U.S. tax deduction for their interest expenses.

The proposed rules would go after earnings stripping following inversions and foreign takeovers by treating instruments issued to related parties in a dividend as stock rather than debt. The guidance would apply to related parties that are part of groups with more than $50 million of debt that would otherwise be treated as stock under the proposal. Related-party debt that is issued to finance actual business investment would still be treated as debt, according to a Treasury fact sheet.

The department said it plans to finalize the proposed regulations promptly.

Treasury also put out new temporary regulations that reduce the tax benefits for “serial inverters,” or corporations that acquire multiple U.S. companies in stock-based transactions in a short time period, Treasury Secretary Jack Lew said.

Additionally, Treasury issued formal regulations implementing the department’s previous inversion guidance released in 2014 and 2015. And the department released an updated business tax-reform framework that describes President Obama’s proposals in this area.

Treasury will also continue to look at other ways it can address inversions. But as he has done in the past, Lew stressed that Congress has to take action for the transactions to be stopped.

“Until that time, creative accountants and lawyers will continue to seek new ways for companies to move their tax residences overseas and avoid paying taxes here at home,” he said.