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Biden Tax Plan Targets Inversions to Keep Them From Coming Back

April 8, 2021, 8:46 AM

President Biden’s global tax plan takes aim at corporate tax inversions—merger transactions that U.S. companies use to shift their headquarters out of the U.S. to a low-tax country—even though the practice has largely disappeared.

The administration may recognize that some of its plans—like raising the corporate tax rate back to 28%, and getting tougher on taxing foreign income—may spur companies to think about inversions again, and Biden wants to nip any such sentiment in the bud, practitioners said.

The anti-inversion proposal, announced Wednesday by the Treasury Department as part of a more detailed version of Biden’s new tax plan, would tighten the threshold at which companies lose the tax benefits of doing an inversion.

But inversions have mostly disappeared already, after Obama-administration regulations sharply limited them and the 2017 tax overhaul was friendly enough to companies that they no longer had an incentive to do them. So why focus on them again now?

The Biden plan implicitly recognizes that his proposals “will shift the balance” for companies in favor of seeking a foreign headquarters in many cases, said Brian Jenn, a partner at McDermott Will & Emery and former deputy international tax counsel at the Treasury Department.

Tax inversions were a major issue in the early 2010s, when a flurry of major companies announced mergers with companies outside the U.S. in order to move their official domiciles to low-tax countries like Ireland. But the combination of the Obama regulations and the 2017 tax overhaul made them less popular: There have been virtually no inversions in the last few years, compared with 31 announced from 2011 through 2017 and completed or still pending, according to numbers compiled by Dealogic, a financial-analytics platform that tracks corporate deals.

Inversion Benefits Reduced

Under current law, the tax benefits of inverting are at least partly nullified if shareholders of the former U.S. parent company still own at least 60% of the combined company’s shares, and completely nullified if it is at least 80%. The Biden plan would tighten that, by generally treating the combined company as a U.S. company for tax purposes if U.S. ownership is at least 50%, or if a foreign acquiring company is managed or controlled in the U.S.

“I think that makes perfect sense,” said Steve Wamhoff, director of federal tax policy for the Institute of Taxation and Economic Policy. When U.S. companies try to use an inversion to claim they have become foreign-domiciled companies, “that’s just a fiction,” he said.

Companies were already unlikely to want to invert, but the new plan appears to target any companies that might be tempted to revive the practice if they have to operate in a tougher U.S. tax environment, said Robert Willens, a New York-based tax consultant. Reducing the ownership threshold to 50% would make inversions “even less likely,” he said.

A Treasury official called the anti-inversion plan announced Wednesday a backstop to other Biden proposals intended to prevent companies from shifting profits out of the U.S.

SHIELD Plan

The anti-inversion provision is part of a plan that would also attack earnings stripping—using interest or royalty payments to a foreign affiliate that have the effect of shifting earnings from the U.S. to another country. The plan, dubbed SHIELD—Stopping Harmful Inversions and Ending Low-tax Developments—would deny tax deductions for such payments if a company bases itself in a country with a low tax rate.

The SHIELD plan is a replacement for the base erosion anti-abuse tax, or BEAT, a provision of the 2017 tax law aimed at preventing profit shifting but which the Biden administration views as ineffective. The SHIELD plan would raise $700 billion over 10 years, according to estimates from Treasury and the congressional Joint Committee on Taxation.

Biden would also overhaul taxes on global intangible low-taxed income, or GILTI. The Biden plan would double the GILTI tax rate from 10.5% to 21% and eliminate companies’ current exemption from the GILTI tax on their first slice of foreign income. It would also assess GILTI taxes on a country-by-country basis, instead of on one “blended” amount that allows companies to offset income from high-tax countries with income from low-tax countries.

To contact the reporter on this story: Michael Rapoport at mrapoport@bloombergindustry.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com

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