Mr. Cope monitors the development of U.S. tax law daily through postings on government websites, daily tax publications, monthly tax journals, tax newsletters, tax conferences and meetings of professionals organizations in New York and Washington. Each month he publishes the Tax Insights Blog, which describes and analyzes significant U.S. tax developments (e.g., judicial decisions, regulations, proposed tax legislation) having cross-border tax consequences. The blog's content should be of interest to U.S. businesses with foreign operations and businesses headquarted outside the United States with U.S. investments or U.S. operations.
Visitors to this website may subscribe to the blog via the RSS link below.
Treasury Places Additional Limits on Corporate Inversions
On November 19, 2015, a few days before the merger of Pfizer and Allergan was announced, the U.S. Treasury and the IRS issued Notice 2015-79 (the “Notice”), which describes regulations that will be issued to further limit corporate inversions. The Notice supplements and complements earlier guidance on corporate inversions announced in Notice 2014-52 during September 2014. The Notice seeks to raise the tax cost of, and limit the tax benefits of, the inversion of a U.S. multinational group. While the forthcoming regulations may discourage certain future transactions, absent legislative changes to section 7704 and section 163(j), corporate inversions are likely to continue as they offer U.S. multinationals significant opportunities for reducing their U.S. corporate income tax liability over the long-term.
Joint Committee Report Questions Obama’s Corporate Inversion Proposal
In December 2014, the staff of the Joint Committee on Taxation released a report entitled: Description of Certain Revenue Provisions Contained in the President’s Fiscal Year 2015 Budget Proposal. The report includes an analysis of President Obama’s proposal to limit the ability of U.S. corporations to expatriate through a corporate inversion transaction. The report is noteworthy because it raises some fundamental policy questions about expansion of U.S. anti-inversion rules.
Treasury Acts Creatively to Limit Corporate Inversions
On September 22, 2014, the Treasury and the IRS issued Notice 2014-52, which announces regulations that will be issued to limit some of the benefits of corporate inversions. The regulations described in the notice will have an effective date of September 22, 2014, with no provision to grandfather inversion transactions currently in progress. The regulations will (i) tighten the anti-inversion rules of sections 7874 and 367 and (ii) expand the scope of sections 304, 956 and 7701(l) to address transactions that some inverted corporate groups may implement to reduce their U.S. federal income tax liability, particularly when moving cash between members of the group.
The most likely effect of these regulations is to discourage certain types of inversions, i.e., transactions motivated primarily by a desire to access cash accumulated in non-U.S. subsidiaries of the U.S. group without paying additional U.S. tax, transactions with a marginal business purpose, and inversions accomplished by a spinoff (“spinversions”). The regulations described in the notice would not significantly limit the opportunity that an inversion provides a multinational group to develop and grow non-U.S. operations beneath the new foreign holding company thereby avoiding U.S. tax on those earnings over the long run. U.S. multinational groups with substantial non-U.S. operations, particularly in the technology and life sciences industries, are likely to continue to find inversions accomplished through the acquisition of smaller foreign companies to be attractive should a suitable partner be available.
Representative Levin Releases Discussion Draft of Legislation to Limit Benefits of Corporate Inversions
On July 31, 2014, Representative Sander Levin (Democrat, Michigan) released a discussion draft of legislation that, if enacted into law, would limit certain tax benefits that often flow from corporate inversions. The legislation is known as the “Stop Corporate Earnings Stripping Act of 2014.” The discussion draft focuses on three areas: (i) tightening the “earnings stripping” rules of section 163(j), (ii) expanding the scope of section 956, and (iii) taxing the “decontrol” of a controlled foreign corporation.
The Corporate Inversion Debate Intensifies
During July the debate in Washington over whether and how to address the growing number of “inversions” of U.S. corporations intensified. The impetus was a letter sent by the Secretary of the Treasury, Jacob Lew, to Representative Dave Camp, the Chairman of the House Ways and Means Committee, Senator Ron Wyden, the chairman of the Senate Finance Committee, Representative Sander Levin, ranking member, House Ways and Means Committee and Senator Orrin Hatch, ranking member, Senate Finance Committee. The letter triggered various responses discussed below.
Senator Levin Introduces Legislation to Further Limit Corporate Inversions
In reaction, at least in part, to Pfizer’s proposed merger with AstraZeneca (now abandoned), on May 20, 2014, Senator Carl Levin (Democrat, Michigan) introduced the “Stop Corporate Inversions Act of 2014.” The proposed legislation, which would be effective from May 8, 2014 if enacted into law in its current form, would further limit opportunities for a U.S. company to acquire a smaller non-U.S. (foreign) company in order to create a corporate structure with a foreign parent.
U.S. Senate’s Hearing on Caterpillar Highlights U.S. Multinationals’ Tax Conundrum
The U.S. Senate’s Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs (the “Subcommittee”) issued a report on April 1, 2104 entitled Caterpillar’s Offshore Tax Strategy (the “Report”). The Report is the result of an extensive inquiry by the Subcommittee’s members and staff, including a public hearing held on April 1, of a business restructuring implemented by Caterpillar beginning in 1999. The Report includes responses to the Subcommittee by Caterpillar, Caterpillar’s auditor, PWC, and expert reports and testimony. The Report, which runs 95 pages, is worth reading because it catalogs in some detail the issues that U.S. multinationals face when implementing a business restructuring that increases their offshore presence while deferring income that would otherwise be subject to current U.S. tax. The final part of this article addresses the tax conundrum that successful US companies, such as Caterpillar, face in today’s tax environment and how some have addressed it.
IRS Provides Additional Guidance on Corporate Inversions
On January 17, 2014 Treasury and the IRS published temporary regulations under section 7874, the Code’s anti-inversion provision, implementing guidance previously announced in Notice 2009-78. The temporary regulations generally define “disqualified stock” i.e., stock that is not taken account in applying the section 7874 ownership test. These temporary regulations follow the 2009 notice for the most part and are effective retroactively to September 17, 2009. The temporary regulations contain a taxpayer-favorable de minimis rule that previously had not been announced, as well as surprising news that the IRS and Treasury are considering expanding the scope of section 7874.