The Treasury Department has announced that it’s going to change tax rules to curb corporate inversions – deals that let U.S. companies move their headquarters overseas, and avoid U.S. taxes.
The new rules would keep companies from playing one of their favorite inversion games: hopscotch.
Here’s how you play: say you’re a U.S. company with a foreign subsidiary. The subsidiary earned loads of money. But you don’t want to bring it back to the U.S., where you’d have to pay taxes on it. So the subsidiary loans the money to a foreign parent you create through an inversion.
“They hopscotch over their U.S. parent,” says Lee Sheppard, contributing editor to the journal Tax Notes. “That’s why it’s called hopscotch.”
Sheppard says the new Treasury rules would make hopscotching illegal. And you can’t play skinny down anymore, either. That’s a way to shrink a U.S. company’s share in a foreign firm created through an inversion.
“I think these rules will be effective at stopping some of the abuses of the past,” says Steven Rosenthal, a senior fellow at the Urban/Brookings Tax Policy Center. “The question, though, is, how effective they will be at stopping potentially new abuses.”
Especially since Treasury hasn’t banned all of the inversion games. Take earnings stripping. That’s where a U.S. company takes out a big loan from the foreign parent it creates in an inversion, and gets to write off the debt payments.
Still, Treasury is making inversions more complicated.
“A lot of transactions that might have been relatively easy are now going to have to be analyzed much more carefully,” says Ryan Dudley, a partner at the accounting firm, Friedman LLP.
In fact, some of the big inversions announced lately may not go through now, because Treasury says the new rules are effective immediately. So if you’ve announced a big inversion deal, but haven’t completed it, you may have to find a new game to play.
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