US tightens M&A tax rules

The US Treasury Department has issued anti-inversion rules that could affect private equity-backed companies.

The US Treasury Department took steps last week to tighten regulations around the way big businesses are taxed following merges and acquisitions.

The new temporary regulations make it harder for one company merging with another to lower its taxes by headquartering in a foreign domicile.

Under previous corporate inversion rules, a US company that became a subsidiary of a new parent company in another country through an acquisition was able to benefit from domestic earnings stripping, and was given the ability to grow the business outside of the US. It also allowed inverted companies to access foreign cash trapped offshore without incurring significant taxation.

Earnings stripping has been a commonly-used tactic used by multinational corporations to escape high domestic taxation by using interest deductions to their foreign headquarters in a friendly tax regime to lower their corporate taxes.

As a result, under new “anti-inversion rules”, which may affect some multinational private equity-backed companies, alongside US companies and foreign-parented multinationals, the treasury has severely limited earnings stripping and access to foreign cash because it believes that they lead to a reduction in tax revenue in the US.

President Obama applauded the new regulations during a speech last week and said that he is “very pleased that the treasury department has taken new action to prevent more corporations from taking advantage of one of the most insidious tax loopholes out there, and fleeing the country just to get out of paying their taxes”.

The rules have been introduced after large US-based pharmaceutical company Pfizer’s proposed a $160 billion takeover of smaller Irish-based pharmaceutical company Allergan, which under previous inversion rules would have allegedly saved Pfizer billions of dollars in taxes.