The US has acted against firms "inverting" to avoid taxes by shifting key legal and tax domiciles overseas.

The US government has introduced rules, taking immediate effect, to make it harder for firms to shift key legal and tax-domiciles abroad through “inversions”, an issue that highlights a broader US fight against forms of tax avoidance. Tax benefits of companies trying to invert will be reduced.

A number of companies in fields such as pharmaceuticals and medical tech, among others, have inverted – moving key functions abroad via mergers and acquisitions – to escape US corporate taxes, which at near 40 per cent are among the highest in the industrialised world. The average tax rate in the OECD member state list (34 countries) is around 26 per cent.

“Today [yesterday] the US Department of the Treasury and the Internal Revenue Service (IRS) issued a notice that takes targeted action to reduce the tax benefits of — and when possible, stop — corporate tax inversions. Companies are increasingly using the technique of inversion, whereby a US based multinational restructures so that the US parent is replaced by a foreign corporation, in order to avoid US taxes. These transactions erode the US tax base, unfairly placing a larger burden on all other taxpayers, including small businesses and hardworking Americans,” a statement from the US Treasury said.

“Specifically, today’s action eliminates certain techniques inverted companies currently use to gain tax-free access to the deferred earnings of a foreign subsidiary, significantly diminishing the ability of inverted companies to escape US taxation.  It also makes it more difficult for US entities to invert by strengthening the requirement that the former owners of the US company own less than 80 per cent of the new combined entity. For some companies considering mergers, today’s action will mean that inversions no longer make economic sense,” it continued.

"Treasury will continue to examine ways to reduce the tax benefits of inversions, including through additional regulatory guidance as well as by reviewing our tax treaties and other international commitments," it added.

“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,” said Treasury Secretary Jacob Lew.

“While comprehensive business tax reform that includes specific anti-inversion provisions is the best way to address the recent surge of inversions, we cannot wait to address this problem. Treasury will continue to review a broad range of authorities for further anti-inversion measures as part of our continued work to close loopholes that allow some taxpayers to avoid paying their fair share,” he said.

Arguably, the issue highlights how governments are in a constant “cat-and-mouse” fight against individuals and firms due to high tax rates, perhaps suggesting that it would be better, and ultimately more straightforward, to not levy such high rates in the first place. Yesterday Senator Orrin Hatch, the senior Republican on the tax law-writing Senate Finance Committee, was quoted by media as saying: "In the end, any solution that permanently addresses inversions must be legislated by Congress."

The measures are arguably less draconian than might have been expected as they appear not to apply retroactively, although such a step would arguably undermine the need for laws to be predictable.

Last week in a separate but related development, the Organization for Economic Co-operation and Development unveiled new proposals to tackle tax avoidance used by multinational companies such as Amazon, Starbucks and Google. The proposed measures aim to increase transparency and close loopholes which allow companies to shift profits to jurisdictions to avoid paying tax by using complex finance structures known as hybrid mismatch arrangements.

Inversions
A report by Reuters said that the rules might be a headache for firms that haven’t yet completed inversions, such as food chain Burger King Worlwide, which is inverting to Canada with a deal with the food and drinks vendor Tim Hortons.

The news service said around 50 such deals have taken place since the early 1980s, but half of those have been completed just since the 2008-2009 credit crisis. Medtronic, a medical tech firm, is working to close an inversion into low-tax Ireland with Covidien. Medtronic has said it expects to close the Covidien acquisition by the end of this year or early 2015.