The US Treasury department recently unveiled plans that are generally viewed as intended to tackle inversions. This policy change led to the termination of Pfizer’s proposed $160bn takeover of Ireland based Allergan. However, these new rules have a much broader impact. The recent changes were discussed today at Taxand’s Global Conference 2016 in Dublin.
The new regulations impacting interest deductibility under the US tax code are viewed by many as the latest volley from the US Treasury Department against inversion transactions and as having been triggered by the now abandoned Pfizer Allergan transaction. However, these new rules ultimately affect all multinationals having a US corporation in their group. ‘Inversions’ have become an easy target in US political rhetoric where companies are seen to partake in deals to benefit their overall tax rate.
However, there is a misconception that it is the inversion itself which creates the favourable tax structure. An inversion transaction may sound mysterious but in reality all you have is a US company owned by a foreign parent company. It is following the inversion deal that US companies might look to issue an interest expense to reduce their taxable income. Under current rules, interest deductions can be high which can therefore erode much of the US company’s taxable income.
Many multinationals may think the rules will apply only to corporate groups that have inverted. However, any corporate group having a non-US parent and US subsidiaries could be impacted. It is therefore important that all multinationals with a US presence take the time to understand the new rules, recognise the potential impact and have the appropriate documentation in place.