Newspaper article St Louis Post-Dispatch (MO)

Nicklaus: If a Loan Is Not a Loan, Multinationals Will Pay Higher Taxes

Newspaper article St Louis Post-Dispatch (MO)

Nicklaus: If a Loan Is Not a Loan, Multinationals Will Pay Higher Taxes

Article excerpt

Treasury officials surely congratulated themselves when a new tax rule caused Pfizer and Allergan to call off their merger. It wasn't the celebrated anti-inversion regulation, though, that drew the loudest protest from an international business group.

The Organization for International Investment, which represents such foreign-owned businesses as Anheuser-Busch, Bunge and Nestl USA, complained about a separate rule that will deny many companies an interest deduction, even if they've never participated in a corporate inversion like the one Pfizer and Allergan were attempting.

Nancy McLernon, the group's president, accused the Treasury of pursuing a "misguided approach that could have a freezing effect on attracting global employers."

Allergan ran afoul of a change that targets serial inverters, or companies that have repeatedly conferred their foreign tax status on U.S. companies. The Treasury decided to look back at three years' worth of such transactions, which would have forced the combined Pfizer-Allergan to remain a domestic company for tax purposes.

The April 4 proposal marked the third time since 2014 that the Treasury tightened the rules on corporate inversions, the controversial deals in which a U.S. company moves its legal headquarters abroad after buying a foreign company.

The three-year lookback will slow such deals but not stop them. By March 2018, if it hasn't made any more U.S. acquisitions, Allergan will again be an attractive takeover candidate for any drug company wanting to incorporate in Ireland.

That's why the Treasury's other proposed regulation is so important. It targets earnings stripping, a process in which a foreign parent loads its U.S. subsidiary with debt. The U.S. company gets to deduct the interest, reducing its taxable income.

Now, the Treasury says such intra-company debt will be treated as equity meaning that the interest isn't deductible unless the money is used for an "actual business investment" such as a new factory. …

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