Sam Lichtman in Forbes: Will Congress Succeed In Closing This Corporate Tax Loophole?

09/25/2014


Congress recently passed new rules designed to remove the attractiveness of corporate tax inversions. Tax inversions are considered to be a strategy that corporations utilize to improve operational efficiencies and reduce their tax burden. Did Congress get it right? Will the new rules accomplish what the administration and many members of Congress desire?...

Today’s notice removes benefits of these “hopscotch” loans by providing that such loans are considered “U.S. property” for purposes of applying the anti-avoidance rule. The same dividend rules will now apply as if the CFC had made a loan to the U.S. parent prior to the inversion...

This rule attacks the so-called “hopscotch loans.” Are there ways to circumvent this rule. In other words, will corporations be able to identify strategies which allow them to continue reaping the benefits of inversions? Here’s what Sam Lichtman, a partner in the Tax Practice Group in the New York office of Haynes and Boone, LLP, had to say about it:

Under the Notice, “any obligation or stock of a foreign related person…will be treated as United States property” resulting in a deemed divided. One potential method to navigate around this rule may be for the cash rich foreign subsidiary to make an advance or prepayment to a foreign affiliate organized in a low-tax or tax haven jurisdiction for inter-company goods or IP or under certain prepaid derivative contracts. Although certain upfront payments are treated as “obligations” for purposes of these rules, there are categories of payments that would not be treated as giving rise to an “obligation.” Absent an inversion, these advance payments by the foreign subsidiary would be includible in income for U.S. tax purposes regardless of whether the payment is structured as a loan or deposit (giving rise to a deemed dividend) or as a business payable (giving rise to operating income). Thus the new notice does not entirely remove the benefits of an inversion with respect to certain “hopscotch” transactions.

Excerpted from Forbes, September 25, 2014. To view full article, click here.

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