US puts squeeze on corporations shifting to Ireland to cut their taxes
Published 15/10/2016 | 02:30
The United States government has heightened its clampdown on big multinationals who try to avoid paying US taxes by shifting income and operations overseas to places including Ireland.
The US Treasury announced new regulations that would limit a company's ability to minimise its tax bill through transactions involving debt, and which do not support new investment in the United States.
It forms the latest step in the US government's fight against so-called corporate inversions, which it has branded a tax avoidance strategy.
In an inversion, the American company typically buys a smaller foreign rival.
It then relocates, at least on paper, to the rival's home country so that the new combined company is not based in the US and can avoid a potentially hefty tax bill.
Ireland has been a favourite location for this type of activity in recent years, with companies essentially reinventing themselves as being Irish to avail of our low corporate tax rate, while keeping their core operations in their original jurisdiction.
Although Congress in the US has yet to agree on a way to deal with the issue, the Obama administration has moved to attempt to deal with the issue in recent years by tightening the rules.
The clampdown so far has already scuppered the planned $160bn merger of drugs giants Pfizer and Allergan, which would have created Ireland's biggest company by shifting Pfizer's global tax base to Ireland.
But other companies that have inverted, mostly through acquisitions, include Perrigo and Jazz Pharmaceuticals.
The latest regulations target so-called earnings stripping, which occurs when the US subsidiary of a newly inverted company avoids taxes on domestic operations by sending them overseas as tax-deductible interest payments.
"This administration has long called for legislative action to fix our broken tax system," said US Treasury Secretary Jack Lew. "In the absence of Congressional action, it is Treasury's responsibility to use our authority to protect the tax base from continued erosion," Mr Lew said.
"We have taken a series of actions to make it harder for large foreign multinational companies to avoid paying US taxes and reduce the incentives for US companies to shift income and operations overseas," he added.
"Such tax avoidance practices are wrong and should be stopped."
"Today's final regulations are an important step in addressing earnings stripping, a commonly used technique to minimise taxes after an inversion."
Business groups, including the US Chamber of Commerce, have warned that the regulations could harm the cash management operations of US-based multinationals.
They also warned that there could be damaging unintended consequences for a range of businesses by creating mountains of red tape.
The Government has in the past stated that Ireland has nothing to fear from the clampdown by the US government.