Jack Lew, the US Treasury Secretary, got a call from Republican lawmakers on August 22 for the overhaul of a number of proposed regulations. These strictures were made to crack down on those US companies which try for a US tax reduction by rebasing outside the United States. This process is termed as inversion.
Too quick adoptions
Top Republicans, through separate letters, warned that the US Treasury is acting too swiftly for the adoption of regulations that prevent overseas mergers called tax inversions. American firms relocate headquarters in nations known for much lower rates of corporate tax. These Republicans are members of House Ways and Means Committee and Senate Finance Committee.
In his letter, Kevin Brady, Chairman of Ways and Means Committee said that if there is no overhaul of the proposed regulations, then it will damage the economy and increase investment barriers for US businesses and investors. They will also interfere with growth of almost all high paying jobs-which should not be permitted at all.
Such regulations were first proposed in April. It has been indicated by the Treasury that it has the intention to move quickly so that the rules are finalized. Industry leaders are afraid that such rules could be put in place as much early as September-and it will be a permanent one. It is to be noted that a new inversion has already been imposed on temporary basis-and it was subsequently challenged in a federal court by a number of American business groups like US Chamber of Commerce.
The proposals, which industry leaders proclaim will red tape all business and cripple operations related to internal cash management at companies which are not linked to tax inversions. Republicans like Brady and Orrin Hatch, the Chairman of the Senate Finance Committee have these proposals on their sights. In his letter addressed to Lew, Hatch said that the sole method to go forward, taking into matter the subject matter complexity, along with a number of substantive concerns, is to issue regulations in a re-proposed form.
The new debt equity rule under proposal is targeted to stop a practice termed “stripping”. This happens when a freshly inverted company sidesteps US taxes simply by moving the profits to another country. These are re-labeled as the tax-deductioble interest payments made for loans to the foreign parent. The Treasury has recommended that debt interest payments should be converted into the non-tax deductible stock dividends.