Treasury Notes

 Treasury’s Work to Address Corporate Inversions. The Facts

By: Rachel McCleery

On Monday April 4, Treasury announced our third action to address the problem of corporate inversions. Since that time, the issue has been the subject of extensive media attention and commentary. This is an important issue, and one that Treasury has been intently focused on for several years. We took previous actions in September 2014 and again in November 2015, each time stating that we would continue to review our authority to act again. Monday’s action was an important step, but it is part of a long, thoughtful process that Treasury has conducted over the last two years.
Some recent commentary has inaccurately portrayed Treasury’s work and has failed to recognize Treasury’s long record on this issue. Here are the facts:
MYTH: Treasury specifically targeted the Pfizer/Allergan merger.
FACT:  This claim is baseless. Treasury’s most recent guidance is the result of an extensive policy process that began nearly two years ago, long before the Pfizer-Allergan deal was even announced. We are only aware of publicly available information and do not have any insights into the details of specific transactions. Our actions are based on our general understanding of abusive practices and the need to address those, not on any specific transaction.‎‎
MYTH: Treasury’s action on “earnings stripping” will keep foreign businesses from investing in America.
FACT:  This assertion is untrue. Treasury is committed to encouraging foreign investment in the U.S. We tailored our earnings stripping rules to focus on abusive practices, not genuine investment in our country. Businesses that are investing in American workers and infrastructure will not be penalized by these regulations.
Our action on earnings stripping is focused on particularly aggressive transactions involving debt. These transactions generate large interest deductions by simply transferring debt between subsidiaries without financing new investment in the United States. The proposed regulations to address earnings stripping generally do not apply to debt that funds business operations or new investment, such as building or equipping a factory.
MYTH: Treasury’s announcement to curb inversions was unexpected and came without warning.
FACT:  The facts clearly show Treasury’s long, public record stating our intentions to take additional action. Since our first action nearly two years ago, we have repeatedly and consistently said we would continue to explore additional ways to examine our authority to address inversions. Secretary Lew publicly voiced this effort both in September 2014 and again in November 2015 when Treasury acted on inversions:
“Treasury will continue to review a broad range of authorities for further anti-inversion measures as part of our continued work to close loopholes that allow some taxpayers to avoid paying their fair share.” [Treasury Secretary Jack Lew, 09/22/14]
Treasury also has been very clear that we were considering action to address earnings stripping. Our 2014 notice stated:
“The Treasury Department and the IRS expect to issue additional guidance to further limit inversion transactions … The Treasury Department and the IRS are considering guidance to address strategies that avoid U.S. tax on U.S. operations by shifting or ‘stripping’ U.S.-source earnings to lower-tax jurisdictions, including through intercompany debt.  Comments are requested regarding the approaches such guidance should take.” 
When we took our last action less than six months ago, the Secretary was very clear that—once again—additional action to curb inversions would be forthcoming, including potential action on earnings stripping:
“We continue to explore additional ways to address inversions - including potential guidance on earnings stripping - and we intend to take further action in the coming months.” [Treasury Secretary Jack Lew, 10/19/15]
In the last few weeks, both the New York Times and Washington Post highlighted the impact a potential upcoming Treasury action might have on the deal between Pfizer and Allergan:
“‘The market just can’t handicap the political risk involved in this deal,’ said Umer Raffat, a managing director at Evercore ISI, an investment banking advisory firm. ‘We don’t know what the Treasury might do.’” [New York Times, 03/12/16]
“Any day now, the Treasury is expected to unveil the final version of proposed regulations it issued in 2014 and 2015 to stop corporate inversions. … The question is whether the Treasury will try to extend its proposed regulations to cover deals involving Pfizer, Johnson Controls, and IHS.” [Allan Sloan, Columnist, Washington Post, 04/01/16]
MYTH: The administration has not been focused on business tax reform.
FACT:  The Administration’s commitment to tax reform is clear. More than four years ago, the President put forward his framework for business tax reform to simplify the code, eliminate wasteful carve-outs, broaden the tax base and level the playing field.  Since then, the President’s budget has laid out additional specific proposals that further build on this framework. The administration has been working with Congress for several years to get this done, engaging with Senators, Members and their staff. We continue to stand ready to work with Congress to enact comprehensive business tax reform.
 As part of this continued work, on Monday Treasury released an updated framework on business tax reform​, outlining the administration’s proposals to date as a guide for future reform.
In the interim, it is Treasury's obligation to protect the tax base. We have repeatedly stated that we will use all of our existing administrative tools to address the problem of inversions, which erode our corporate tax base, unfairly placing a larger burden on all other taxpayers, including small businesses and hardworking Americans.
Rachel McCleery is a Spokesperson for The Office of Tax Policy at the U.S. Department of Treasury.
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