Will new rules curb all tax inversions? Nah

The latest Treasury rules cracking down on tax "inversions" are likely to trip up many of the companies that sought to save billions in taxes by renouncing their U.S. corporate citizenship or moving some taxable income overseas.

A Burger King Whopper and French fries are shown in Tiskilwa, Ill.
Daniel Acker | Bloomberg | Getty Images
A Burger King Whopper and French fries are shown in Tiskilwa, Ill.

The United States' 35-percent corporate income-tax rate is significantly higher than the tax rate in most of the industrialized world. Even high-tax countries like Canada and the United Kingdom have lower corporate tax rates.

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President Obama announced that, effective immediately, the Treasury Department would impose a more stringent test on tax inversions. Essentially, it will require the American part of the company to own less than 80 percent of the combined company in order to benefit from the other country's lower tax rates. Inversion deals in the works that are between 60 and 80 percent American owned will be allowed to go through – but with tax consequences.

The new rules will likely deprive Medtronic, Salix, Mylan and the other pharmaceutical companies of the tax advantages they expected from their mergers with overseas companies.

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Ironically, the Burger King-Tim Hortons deal is likely to meet the more stringent test. It remains to be seen whether the pharmaceutical companies will elect to close their deals or instead try to escape them by paying a break-up fee.

These new Treasury regulations are likely to act like administering antibiotics to a sick patient. It will kill off the deals that were designed to comply with old rules, but new deals will quickly sprout up that are even more resistant to regulation. Investors have clearly lost their squeamishness at owning a company that is organized under Canadian, Dutch or Irish law. So long as U.S. corporate tax rates are so much higher than those in competing nations, there will always be a strong financial incentive for U.S.-based multinationals to figure out a way to move their corporate citizenship overseas.

There is an old joke in tax practice. "What is the difference between legal tax avoidance and illegal tax evasion? One year."

Commentary by Mitchell Epner, an attorney specializing in white-collar crime, sports and entertainment law and intellectual property. He's also a former Assistant United States Attorney in the District of New Jersey. Follow him on Twitter @mitchellepner.

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