News › Weekly Alert Article

IRS Decision on Offshore Inversions

27 Aug 2012

As multinational enterprises grow and evolve, they become less associated with any one country's economy. Businesses that start out headquartered in one jurisdiction are increasingly finding that their growth depends on following their customers and their suppliers to other parts of the globe.Taxand USA delves into the implications of IRS decisions on mulitnational companies worldwide.

Multinationals that have historically had their parent companies incorporated in the United States have gone through cycles over the past two decades of seeking to relocate to other jurisdictions. The US tax rules that govern these migrations have similarly evolved.The latest development in this area is a new set of regulations issued by the IRS, which provide more certainty regarding how a multinational enterprise with a current US parent could migrate elsewhere. However the rules are extremely restrictive and are likely to dampen the impetus for future migrations except in narrow circumstances.

These offshore parent migrations are sometimes referred to as "inversions", because a US parent with foreign subsidiaries is "inverted" into a foreign parent with US subsidiaries. Once inverted, the new foreign parent can then establish parallel foreign subsidiaries to mirror the former US parent's international operations through a variety of techniques and subsequent transactions.

Companies which have inverted include multinationals such as Accenture, Cooper Industries, Everest Re Group, Foster Wheeler, Fruit of the Loom, Global Crossing, Ingersoll Rand, Leucadia National Group, Nabors Industries, Noble Drilling, Seagate Technologies, Trenwick Group, Triton Energy Corp. and Tyco International.

Although aware of this trend, the Treasury and Congress struggled for two years to develop an appropriate response. In 2004, Congress enacted new Section 7874. Under the new law, some transactions with "surrogate" foreign entities would be treated as taxable without the benefit of tax attributes to offset any realised gain. Other "surrogate" foreign entities would be treated as US corporations for all purposes of the Internal Revenue Code, effectively negating the most common forms of inversion transactions. No longer could a US corporation simply could not migrate to a "surrogate" foreign entity for US tax purposes.

On 7 June 2012, the Treasury modified the temporary regulations regarding the substantial business activities test under Section 7874. This time, the "facts and circumstances" test has been removed, and the "safe harbour" has returned. The thresholds are that 25% of sales, assets and employees of the worldwide expanded affiliated group, and both payroll and headcount in the country of incorporation, must be at least 25 percent of the total. This bright-line test brings more certainty to the outcome, but makes satisfaction of the test extremely difficult for any truly global business.

Discover more: Taxand USA investigates offshore inversion transactions

Taxand's Take

If a company is considering moving its parent company from the US to a foreign jurisdiction, such a transaction is increasingly difficult to accomplish. However it may still be possible for a global business if it has 25% or more of its property, employees and sales in the jurisdiction in which it will be incorporated, or if a company combines with a foreign-owned group in the proper proportions. Therefore thinking ahead and proper structuring may get a multinational company a more tax-efficient answer while still meeting the needs of the business.

Your Taxand contact for further queries is:
Kent Wisner
T +1 415 490 2800

Taxand's Take Author