Risk & Economy » Tax » US takes first steps against tax ‘inversions’

THE US has made its first significant move in scuppering American businesses shifting their headquarters abroad in order to take advantage of favourable tax conditions.

It comes just months after the collapse of Pfizer’s attempted takeover of AstraZeneca, at least in part motivated by tax. Last month, San Francisco-based hedge fund Marcato contemplated a move for Intercontinental Hotel Group which would bring with it a UK tax base, while the latest development could derail Burger King’s $11bn (£6.7bn) acquisition of Tim Hortons, the Canadian coffee chain.

The tactic, known as inversion, is primarily motivated by the disparity between the US’s high 35% corporate rate and the UK’s imminent 20% rate, brought in by the coalition to attract additional business to the UK. The current rate is 21%.

As changing legislation pertaining to the practice could take a matter of years, more short-term measures have been taken which will see US businesses meet a raft of new provisions if they want to buy a foreign firm and relocate their headquarters.

As such, an American firm looking to shift their tax base overseas will have to shake up their investor base to ensure at least a fifth of the expanded business is held by new investors. The latest rules will apply to all deals yet to be rubber-stamped.

President Barack Obama has denounced so-called tax inversions as unpatriotic and has urged congress to stop them.

“They’re basically renouncing their citizenship and declaring that they’re based somewhere else, just to avoid paying their fair share,” Obama said recently.

Jack Lew, the US treasury secretary, said in the Telegraph: “These first, targeted steps make substantial progress in constraining the creative techniques used to avoid US taxes, both in terms of meaningfully reducing the economic benefits of inversions after the fact, and when possible, stopping them altogether.”