Inversion, an international merger that allows a company to relocate its headquarters on to foreign soil, is not always done with the intent to avoid paying U.S. taxes (but sometimes it is). And, unless the company provides misrepresented information on a tax return or uses of intentional and illegal acts to hide assets, the process is not considered illegal. But the Internal Revenue Service (IRS) and U.S. government does not necessarily favor the concept, particularly when such mergers are done in the spirit of personal gain rather than economic efficiency. As such, they have passed new rules to further restrict corporate tax-dodging and, consequently, inversion altogether.
New Rules Take a Stab at ‘Cherry-Picking’ and ‘Stuffing’
Over the last few years, the U.S. Treasury Department has devised several new rules to make inversion less appealing for companies. For example, the action under 956(e) aimed at preventing ‘hopscotch” loans, which were allegedly used by some U.S. corporations as income but were “loaned” by the controlled foreign corporation (CFC) to reduce the amount of taxation received on said income. The new rules specifically take a stab at acts known as “stuffing” and “cherry-picking.”
The first act - “stuffing” - is one in which the non-U.S. company is artificially made bigger prior to the merger to ensure the U.S. company complies with the 80 percent threshold needed to reap inversion tax benefits. The new rules attempt to curb this action by restricting this bulking up time period to three years.
In the strategy known as “cherry-picking,” corporations allegedly search specifically for an address that will provide them with a more favorable tax treaty. New rules will limit this ability by restricting mergers to only the addresses in which the merger partner is already organized.
Lawmakers and Government Officials Divided on Inversion Pros and Cons
Not everyone agrees on the new inversion rules; in fact, many do not agree with the former inversion rules. Some view such amendments as more of a game of cat and mouse than a process by which to improve U.S. tax collections. Others believe that further restrictions will only hinder the U.S. economy, not help it. But those that are passing the rules, and many liberals and Democrats, immediately favor such provisions; they view it as a way to protect the U.S. economy and create new jobs on U.S. soil.
How New Inversion Rules May Affect Small Businesses
Legitimate, honest international mergers exist. Oftentimes, these are smaller companies that, for whatever reason, end up finding more business in foreign countries. Tax credits granted by the U.S. may not help ensure the business is able to thrive and, over time, it may become clear that the business needs to move overseas if they hope to survive. The new inversion laws could hinder the process for these smaller, struggling companies. In turn, this could cause issues with the IRS.
If your small business owes the IRS or is currently undergoing an audit, it may be time to talk to an attorney. Attorney Eric Zelazny is both an attorney and a certified public account who has been helping companies in Cook County with their IRS problems since 1996. Get the experienced help you need. Schedule your free initial consultation with a skilled Tinley Park small business IRS tax attorney by calling 708-888-2299 today.