TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, February 14, 2018

WSJ: New Tax Law Haunts Companies That Did Inversion Deals

Wall Street Journal, New Tax Law Haunts Companies That Did ‘Inversion’ Deals:

The new U.S. tax law has something in store for some “inverted” companies, which signed mergers overseas that lowered their U.S. taxes: higher taxes.

Companies that engineered so-called inversion deals in recent years have been able to reduce their tax rates and take certain deductions by shifting their tax homes to other nations. Now, provisions in the new tax code restrict some of those deductions, like the interest payments American subsidiaries pay on loans from overseas parents, according to tax experts and companies. ...

Overall, the new restrictions are estimated to raise tens of billions of dollars in tax revenue, though not all of it will come from inverted companies. Tax experts and companies say the law will reduce the advantages of the corporate relocations, but probably not enough to bring companies back to the U.S.

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The new U.S. tax law doesn’t target already-inverted companies specifically, tax experts and companies say. But it restricts things like interest deductions on which inverted companies rely heavily.

The provision known as the Base Erosion and Anti-Abuse Tax limits the degree to which big companies can deduct interest expenses and royalties that U.S. subsidiaries pay to their foreign parents. Another measure caps how much interest a company can deduct at 30% of its earnings before interest, taxes, depreciation and amortization. Such provisions will bring the bills for some inverted and other foreign companies that shelter U.S. earnings closer to what U.S.-based rivals owe, according to Bret Wells, a tax professor at the University of Houston Law Center.

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