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Tax inversions inverted: US moves on loopholes used by Ireland-based companies

Confused? We look at US corporate tax reforms and how they could affect this country.

US President Barack Obama has welcomed moves to stamp out tax inversions.
US President Barack Obama has welcomed moves to stamp out tax inversions.
Image: Manuel Balce Ceneta/AP/Press Association Images

IRELAND’S ABILITY TO attract major companies to its shores could be under threat after US financial officials moved to stamp out so-called “inversions”.

The US Treasury stepped in yesterday to stop the “creative techniques” companies were using to avoid its taxes, saying its plans would either get rid of inversions altogether or at least cut the economic benefits to businesses which exploited the techniques.

Several major US companies, including recently medical manufacturer Medtronic, have planned to shift their tax bases to Ireland with the lure of the country’s low corporate tax rate of 12.5% – compared to a nominal rate of 35% in the US.

Treasury secretary Jacob Lew said the tax reforms would mean offshore deals would no longer make economic sense for some companies considering inversions.

“Inversion transactions erode our corporate tax base, unfairly placing a larger burden on all other taxpayers, including small businesses and hardworking Americans,” he said.

It is critical that this unfair loophole be closed. This shifting of a firm’s tax address is not the same as a merger driven by business reasons, such as efficiency or expansion.These transactions may be legal, but they are wrong, and our laws should change.”

Treasury Anniversary US Treasury secretary Jacob Lew Source: Carolyn Kaster/AP/Press Association Images

So what are these inversions?

An inversion deal involves a company setting up in a new tax home after merging with or taking over an overseas business.

The offshore partner then “owns” the company’s earnings for tax purposes, but can still keep using the money as part of its US operations mostly – or completely – tax free.

But the Treasury move would stop overseas offshoots of US companies being treated as independent from their parent businesses and close a loophole allowing “hopscotch loans” between parts of the same company being used to shift profits without being taxed.

Earlier this year, US-based Medtronic announced it was shifting its tax base to Ireland after buying out major local player Covidien in a €32 billion deal.

The inversion came despite €48 million in penalties the US government levelled at its executive for taking the company offshore for tax purposes.

A TheJournal.ie poll which asked if Irish tax laws should be reviewed to stop companies “gaming” the system showed most readers didn’t care about US companies shifting their tax base here to maximise their profits.

Inversions Source: TheJournal.ie

Obama glad

President Barack Obama, who has previously singled out Ireland in his criticisms of US companies’ tax shifting, said he was glad new action was being looked at to “help reverse this trend”.

We’ve recently seen a few large corporations announce plans to exploit this loophole, undercutting businesses that act responsibly and leaving the middle class to pay the bill,” he said.

At least they’re not still talking about the “Double Irish”

The US announcement comes less that a week after the OECD unveiled the first part of its multi-step plan to reform international tax-avoidance schemes – including the infamous “Double Irish” tax loophole.

The tactic involves multinationals using Ireland as a jumping-off point to a tax haven like Bermuda to avoid paying their tax bills.

Jobs Minister Richard Bruton yesterday signalled Ireland could move to close the loophole in the budget ahead of any international agreement.

READ: Obama accuses companies that relocate to Ireland of ‘gaming the system’

READ: ‘Double Irish’ tax loophole in the firing line

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About the author:

Peter Bodkin  / Editor, Fora

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