The US Department of the Treasury (Treasury Department) and the US Internal Revenue Service (IRS) have announced a series of new rules to prevent US companies to transfer their headquarters abroad in order to avoid US taxes.
Referred to as ‘tax inversion’, this practice consists in a US based company merging with a foreign business and restructuring or inverting its headquarters in the foreign jurisdiction.
By doing so the company is no longer considered as a US businesses and is not required to pay taxes on the profits it earns abroad, even though it still pays taxes for earnings generated in the US.
The tendency for businesses to choose to invert in a jurisdiction with a lower corporate tax rate than that of origin means the strategy is considered a form of tax avoidance.
These practices have come under a lot of scrutiny worldwide, and in the US it has gained a lot of traction in the public debate since President Barack Obama speech in last July where he called for economic patriotism.
"Economic patriotism would say that instead of protecting corporations that are shipping jobs overseas, let’s make sure they’re paying their fair share of taxes, let’s reward American workers and businesses that hire them," Obama said.
Under the introduced new rules, inversion deals will only be allowed if the US entity owns less than 80% of the overall business. And if the US entities owns between 60% and 80% of the overall business, the inversion deal will be allowed to go through but the company will still have some tax obligations in the US.
Treasury Secretary Jacob Lew said the measures aimed to make inversions "substantially less economically appealing".
US Public Research Interest Group (PIRG) tax and budget associate Jaimie Woo said the changes are part of a wider discussion around the need to counteract harmful tax practices in the US.
"It has become a really big issue. We’ve never seen tax issues cause such public outrage," she explained. "There have been a lot of proposals, both from the administration and from congress that have been put forward to tackle these problems."
However, she said the Treasury announcement alone cannot solve the problem, as it is only one piece of the whole solution.
"It is just the first step and there needs to be a follow up from Congress," she said. "Really it’s now up to Congress to pass meaningful reform that really gets at these massive loopholes that allow corporations to avoid paying their taxes."
Woo said she hopes the surge in public interest will also help give the necessary momentum for change, but she also expressed caution: as the 2016 US general election approaches, a lot will depend on the outcome.