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The New York Times reports this morning that the US Department of the Treasury will institute new rules "aimed at making it more difficult for American companies to lower their tax bills by relocating overseas and that would wipe out the benefits for those that do … The changes will only affect deals that were completed starting Monday. But they could include pending inversion deals, like the one involving AbbVie, an Illinois-based pharmaceutical company that is in the process of acquiring its smaller British rival, Shire, or the Minneapolis medical device maker Medtronic, which is acquiring Covidien in Ireland."

The Times explains the changes this way:

"The guidelines use existing Treasury regulations to crack down on complicated transactions like internal loans, stock purchases and sales that such inverted companies use to substantially reduce the tax they owe in the United States. They would short-circuit so-called hopscotch loans — when an American parent company uses its foreign subsidiary’s earnings without paying United States taxes — making the loans count as American property.

"The rules also prevent inverted companies from taking advantage of a strategy known as decontrolling, when an inverted company essentially has its foreign entity buy enough stock from the American parent that it has access to earnings from the overseas branch without ever paying United States taxes on them. They could still make the stock purchases, but the tax benefit would vanish. And inverted companies could no longer transfer cash or property from an overseas entity to the new foreign parent company without paying taxes in the United States."

The moves by the Obama administration follow the decision by Burger King to buy Tim Horton's and move its official domicile to Canada, and the speculation that Walgreen would move its HQ to Europe following its purchase of the Alliance Boots shares that it did not own.

According to the Times, Treasury Secretary Jacob Lew says that the administration would have preferred to deal with the problem through comprehensive tax reform legislation, but pre-election gridlock made it unlikely, if not impossible, that a politically polarized Congress would address the issue.
KC's View:
As I understand it, these new rules only serve to make it harder for companies to do inversions. Actual legislation is needed to prevent it.

But, as we all know, Congress seems institutionally adverse - or even incapable of having a reasoned debate, coming to a compromise, and passing legislation. Heck, this is a governing body that at what essentially is a time of war, decided to go home to campaign … because, let's face it, getting re-elected is a lot more important than actually doing your job.