Lew: New Inversions Guidance Coming This Week

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Nov. 18 — The Treasury Department will be issuing “additional targeted guidance” by Nov. 19 to cut back corporate inversions, Treasury Secretary Jacob J. Lew told lawmakers in a letter obtained by Bloomberg BNA.

Lew said in the letter that while only legislation can completely stop inversions, and the administration needs more authority, the Treasury guidance is intended to “deter and further reduce the economic benefits” of these deals. The letter was sent to the chairs and ranking members of the House Ways and Means Committee and the Senate Finance Committee.

The guidance comes amid plans for Allergan Plc and Pfizer Inc. to merge, which could create the largest U.S. tax inversion in history if, as expected, New York-based Pfizer were to set the combined company's headquarters in Allergen's home nation of Ireland. Shares of Allergan dropped 4.4 percent in trading on news of Treasury's plans to issue the guidance.

Further Treasury action on inversions has been anticipated since the Internal Revenue Service issued Notice 2014-52 in September 2014, detailing a range of actions to take away the benefits of inversions (185 DTR G-8, 9/24/14).
Lew said in the letter that “we made it clear that we were not done, and Treasury has spent the ensuing time reviewing a broad range of options for further action.”

Details Unclear

Practitioners said Nov. 18 they were eagerly awaiting guidance, but the letter offered few clues as to what it will address.

“It's not clear to us what that additional targeted guidance might be,” Jeffrey Paravano, managing partner at Baker & Hostetler LLP, told Bloomberg BNA. He said it isn't clear whether it might be guidance to implement the notice or more narrow guidance to target specific transactions.

Lawmakers took different views on the news, with House Ways and Means Committee ranking Democrat Sander Levin urging that “the fact that American companies, including Pfizer, continue to pursue inversions makes clear that additional steps are needed to stop this trend. I am encouraged that Treasury intends to take additional steps to curb tax inversions, but also recognize that their authority in this area is not unlimited—as Secretary Lew noted today. Congress should get off the sidelines and take action to change the law to stop these tax-motivated inversions.”

Guidance Soon

Levin told Bloomberg BNA Nov. 18 that he spoke to Treasury's Lew earlier in the day. Based on that conversation, “We expect the further regulations to come out probably” Nov. 19, Levin said.

Republicans in Congress don't seem impressed. Senate Finance Committee Chairman Orrin G. Hatch (R-Utah) told Bloomberg BNA that the only solution to companies moving to lower tax jurisdictions is to make U.S. rates more competitive, and that he aims to meet with Lew to clarify details of Treasury's plan.

Republicans Criticize Tax Rates

“The only way to take care of inversions is to bring our tax rates down,” Hatch said. “They keep trying to come up with these things that basically are going to push our companies overseas.”

Rep. Tom Price (R-Ga.), a House Ways and Means Committee member and chairman of the House Budget Committee, agreed. “They should wake up and recognize that the root cause of inversions is the highest corporate tax rate in the industrialized world,” he told Bloomberg BNA. “An agreement to lower business tax rates is the solution, he said, not unilateral rule-making.

Baker Hostetler's Paravano was joined in the Nov. 18 interview by Paul Schmidt, managing partner and chair of tax at the firm, who said a big question for taxpayers is whether the forthcoming guidance will deal with reducing the benefit of interest deductions in the U.S. Another major issue is whether the administration will address earnings stripping.

With assistance from Aaron Lorenzo and Casey Wooten in Washington.

To contact the reporter on this story: Alison Bennett in Washington at abennett@bna.com
To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com