US Treasury Department imposes new rules to prevent 'earnings stripping' practices
Apr 05, 2016 03:57 AM EDT
The U.S Treasury Department is now creating new rules in order to prevent U.S companies from shifting their main headquarters to other countries. The new rules sprouted from the issue of Allergan's acquisition of Pfizer for it to become an Irish company.
Company inversions have been rampant during the Obama administration. U.S companies often let foreign investors acquire their company in order to avoid the high taxation from the United States. The department's new rules, however, will prevent the practice of "earnings stripping" which is basically used by U.S companies to lower their U.S taxable profits as per The Washington Post.
Jacob J. Lew, the Treasury Secretary, said they are doing additional precautions to reduce the ability of companies to avoid taxes that are meant to be imposed on them. As reported by the Street Insider, companies have been taking advantage of a system that would basically allow them to move their tax residence to other countries in order to avoid U.S taxes without the need of changing their business operations.
The issue started when pharmaceutical giant, Pfizer, announced the deal that it had with Allergan. With the deal done, Pfizer will now have the chance to move its headquarters to Ireland, making the company save up to $35 billion in U.S taxes. But with the new rules in place, it will still be unclear if the Allergan-Pfizer deal would still be affected given that the acquisition is already finished.
Tax attorney at New York's Shearman & Sterling, Laurence Bambino, said the rules will be expansive but they are aimed at stopping such activity as the Allergan-Pfizer deal. According to the New York Times, Pfizer and Allergan said in a statement that they are still reviewing the announcement of the Treasury Department and will not give any comments yet on the matter.
Under the new rules, however, the stocks that Allergan had acquired within the last three years will not be included in the tax computation. Companies have a few choices when it comes to tax as long as the United States remains the highest in all developed countries at 35 percent tax rate, according to business leaders.