April 4, 2016 — The IRS (Internal Revenue Service) and the U.S Department of Treasury released temporary and proposed regulations which will limit the growing number of businesses using the power of inversion to save money from taxes.
Defining Corporate Inversion
For corporations who wanted to avoid paying too much U.S taxes, then this business technique is a no-brainer.Corporate inversion is a strategy which happens when you move your business to another location with a lower tax rate so that you can reduce your burden in tax.
An Inverted Reality
Flickr (johnny dollar)
Imagine you’re in a million dollar company with so many parts/divisions, and is doing business within a country with a higher corporate tax rate.
You can’t just take your whole company to another country, so what you’re gonna do is to look for a country with a lower tax rate, see if there’s a business that is identical like yours and buy or merge with it, then you move a large part of your business to the new one. The result is that you would be paying taxes smaller than usual, which serves as a good news for businesses, but bad news for the government, since they’re gaining less tax money.
Remember that even though taxes are being paid in another country with lower tax rate, it still cannot be considered as an issue of tax evasion, as long as the information in the return have no errors and are clearly elaborated.
What the IRS and the Treasury Department Want?
The Treasury Department released a guidance that will give restrictions to businesses on inverting. By adding difficulty to the process they are hoping that it can limit the total number of businesses that undergo corporate inversion. With this proposed set of rules, the Internal Revenue Service first wants to justify if the business has all the criterias of being an inverted business which is operating in another foreign parent country. Furthermore, they would not recognize the inverted business if the shareholders of the U.S company still owns 80% of the merged company.
The guidance also took notice of earnings stripping, which is a tactic on minimizing U.S taxes. Here is a fact sheet from the Treasury Department where you could learn more about the regulation.