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| Source: alextom.com |
According to the Wall Street Journal, the new rules would try to stop "companies that have engaged in multiple inversion transactions" by "disregarding three years of past mergers with U.S. corporations in determining the size of the foreign company. By subtracting the value of U.S. assets a foreign company had acquired, the foreign company would become smaller in relation to the U.S. company." Additionally, the new rules would try to stop a practice called "earnings strippings," which is when "the US arm borrows money from what is now its foreign parent and then sends large interest payments back overseas. This reduced profits declared in the US and increases the profits declared in the lower tax jurisdiction abroad" (The Irish Times).
This move is expected to impact the originally planned merger of Pfizer, an American based pharmaceutical company, and Allergan, an Irish based pharmaceutical company. Pfizer initially wanted to merge with Allergan in order to invert to Ireland to take advantage of their lower tax rates. Since the new rules would remove some of the planned tax benefits, it's unclear whether Pfizer and Allergan will still go through with the deal.
Obama praised the new rules and called on Congress to take legislative action against corporate tax inversions, stating, "Only Congress can close it for good and only Congress can make sure that all the other loopholes that are being taken advantage of are closed" (CBS News). However, others believe that increasing regulations is not the right way to stop corporate tax inversions. Instead, they believe that the best method would be to lower the U.S. corporate tax rate, which would encourage companies to stay in the U.S.
Questions:
What impact do you think the new rules will have on corporate tax inversions, such as Pfizer's planned merger with Allergan?
Do you think increasing regulations is the best method to stop corporate tax inversions, or is decreasing the corporate tax rate itself a better solution?
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