Implications of The New Fed Rules To Check Tax Avoidance Mergers, Acquisition And Corporate Alliances

by Benson Agoha | Economy

Mergers and Acquisitions become the latest target of official regulation as rules are reviewed and tightened to stop organisations piling up in order to reduce their tax bills.

Industry Week reported Tuesday, the announcement of new rules by the U.S. Treasury, Monday, aimed at stemming the tide of mergers between U.S. and foreign businesses designed to sharply lower the U.S. company’s tax bill and leading to loss of needed state revenue.

This is a direct hit to big business to bring them in line and not dodge their tax responsibilities to the state, even when they are making astronomical profits.

The latest US move comes after Treasury Secretary, Jacob Lew, said the toughened regulations target "companies moving their headquarters, but not their U.S. operations, to low-tax domiciles abroad via so-called inversion deals."

* The change in rules is significant as it will be sure to affect apex corporate decision making and the capacity for large organisations to locate and relocate at will.

* The new rules will make it tougher for companies involved in stock-based merger deals to achieve the minimum foreign ownership required to avoid U.S. corporate tax liability.

* They also make it harder for smart practices, such as companies “striping” earnings from their U.S. units by loading them with debt from an offshore parent.

The Treasury Secretary justified the new steps saying: “For years, companies have been taking advantage of a system that allows them to move their tax residences overseas to avoid U.S. taxes without making significant changes in their business operations.”

He said: “Many of these companies continue to take advantage of the benefits of being based in the United States — including our rule of law, skilled workforce, infrastructure, and research, and development capabilities — all while shifting a greater tax burden to other businesses and American families.”

In the United Kingdom, Companies like Google, Facebook, Starbuks have all acquired businesses in locations abroad known 'as tax heavens' and some have been pilloried for paying too little a Tax proportionate to the amount of profit they declare.

Google and Starbucks are at the forefront of organisations that have been publicly criticised for paying too little in corporate tax. And while some have made recognizable effort to remedy the damage, a great many other Mergers and Acquisition take place annually have the same cost-reduction and profit maximisation of goal.

It's much like saying either you are with us or you are not, so think before you make that decision.

How big business will respond to this new rule is yet to be seen although, at least for now, it does not apply to deals that have already been concluded.

Instead, the Treasury’s actions, which came in lieu of action by Congress to reform tax laws, had helped slow the pace of inversion deals and will apply to any deal not yet consummated. One deal no yet , which potentially includes the Pfizer-Allergan deal.

The new rules have been coming for a while and add to a group of regulatory updates announced last November that were meant to stall the surge in inversions worth hundreds of billions of dollars especially in the pharmaceuticals industry.

That includes the Pfizer’s record $160 (£113.7) billion proposed purchase of Allergan, which one anti-inversion group said could save it $35 (£24.8) billion in U.S. taxes.

“Congress should not wait to act as inversions continue to erode our tax base,” he said.