Treasury announces new steps to keep companies in U.S.

Lew announced a notice to issue five new items of guidance meant to limit so-called corporate “inversions,” three meant to prevent companies from moving their headquarters outside the U.S. and two to prevent companies that have undergone inversions from transferring taxable income out of the country.

“These actions futher reduce the benefits of an inversion, and make these transactions even more difficult to achieve,” Lew said on a teleconference with reporters.

He called the new rules “an important step, but not the end of our work.”

Lew added that the Treasury would introduce new guidance in coming months intended to curb the practice of “earnings stripping,” a maneuver in which inverted companies minimize U.S. taxes and shift taxable earnings to their low-tax parent company by loading up on tax-deductible debt in the U.S.

Thursday’s announcement follows guidance issued in September 2014 also intended to address inversions. Lew said Thursday that last year’s rules “made a real difference.”

Looming in the background was the deal being negotiated by pharmaceutical giant Pfizer with Ireland-based drugmaker Allergan, a deal that could prove to be one of the biggest inversions yet.

The U.S. has laws preventing companies from simply placing a mailbox in a tax haven and declaring that their headquarters to get around taxation. But the laws can be circumvented, in particular by having multinationals combine with an existing company in a low-tax jurisdiction and then placing the headquarters of the new combined company there.

Thursday’s announcement is not directly aimed at the potential Pfizer-Allergan deal, a Treasury official said. Instead, he said the administration’s intent is “really to look at the law and see what administrative steps we can take to make the law clearer and also implement the intent of the law.”

One of the rules would limit inversions that resulted in the merged companies’ headquarters being located in a third country with low taxes. A Treasury official said the measure “is probably the one that will address transactions that had the largest abusive component to them.”

The new guidance also would do more to address the phenomenon of the foreign company in an inversion artificially inflating its size to meet the requirements set in law meant to ensure that it is a legitimate business partner and not simply a mailbox in the Cayman Islands. It would require newly inverted companies to incorporate in the country where they demonstrated that they have enough real business activities to satisfy the anti-inversions rule.

The Treasury would seek to undercut the benefits of inversions by charging U.S. taxes on foreign operations that multinationals transfer to the newly incorporated headquarters, and to levy additional taxes on some restructurings of inverted companies.

Lew reasserted, however, that administrative action cannot prevent U.S. companies from fleeing the country. Only tax reform and legislation can do that, he said.

Congressional Democrats welcomed the Treasury’s action, Sen. Ron Wyden of Oregon, the ranking Democrat on the Senate Finance Committee, said that the only wat to “end the inversion virus that is plaguing our country … is through true bipartisan tax reform.”

Rep. Sander Levin of Michigan, Wyden’s counterpart in the House, said that “rumors that Pfizer may announce its plans to invert as soon as next week, making it potentially the largest inversion ever, highlights the urgent need for Congress to act, in addition to steps taken by Treasury.”

Sen. Orrin Hatch, however, the top Republican on the Senate Finance Committee, said the rules would have to be “carefully scrutinized.” Efforts meant simply to stop inversions, he warned, could have the effect of incentivizing foreign takeovers. He called for comprehensive tax reform instead.

All of the new rules would apply to transactions happening after Thursday.