US Treasury takes further action to make corporate 'inversions' more difficult

The new measures build on the "targeted steps" announced by the Treasury last year, and will make it more difficult for US companies to merge with foreign companies under a new foreign parent company. In particular, new foreign parent companies of US subsidiaries will have to be tax resident in the country where they are created or organised.

Treasury secretary Jacob J Lew said that the measures announced last year had made a "real difference", "resulting in a decline in the pace of these transactions". However, tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com, said that the department was "trying to hold back the tide despite knowing that it is almost impossible".

"If the US is serious about preventing companies leaving the country, it needs to pass legislation – which is very difficult to do in the run-up to the 2016 presidential election," she said.

"It is slowly dawning on the US that its tax system is out of step with most of the rest of the developed world, and it is continuing to fight a losing battle to prevent inversions. If the OECD's Base Erosion and Profit Shifting project succeeds, the likely result is that US companies will start to face higher tax bills in Europe – and that might finally provoke the US Congress into passing major tax reform measures for the first time since 1986," she said.

Corporate inversions occur when US-headquartered multinational companies restructure so that the US parent company is replaced by a company in a lower tax jurisdiction. The US Treasury first took action against the practice in September 2014 after a number of high profile transactions in the life sciences and leisure sectors. It has claimed that the practice "erodes the US tax base" by allowing companies to avoid the US taxes they would otherwise be required to pay.

The Organisation for Economic Cooperation and Development (OECD) is currently working on a single set of international tax rules to prevent multinational companies from artificially shifting profits to low-tax jurisdictions. Among its plans to tackle so-called base erosion and profit shifting (BEPS) tactics are ending hybrid mismatch arrangements, preventing the abuse of tax treaties and ensure that transfer pricing rules do not allow companies to avoid being taxed in the jurisdictions where they make their profits. Once finalised, the rules will be implemented by all OECD member countries, including the EU.

The new rules governing inversions will apply to all transactions completed on or after 19 November 2015. They will restrict the ability of US companies to merge with companies in other countries under a 'third country' foreign parent, as well as their ability to inflate a new foreign parent company's size in order to bring the transaction within the inversion regime. A new rule requiring the new foreign parent company to be tax resident in the country where it is created or organised will also apply, preventing the US company from replacing its US tax residence with tax residence in another country unless it has "substantial business activities" there.

The US Treasury has also acted to limit the ability of an inverted company to transfer its foreign operations to a new foreign parent company after an inversion transaction without paying US tax. This change applies to all inversions completed on or after 22 September 2014, when the original changes come into force.

US-headquartered pharmaceutical company Pfizer and Allegan, the Irish headquartered pharmaceutical company, have announced a definitive merger agreement which will follow the corporate inversion model. The two companies will combine under the existing Allergan plc, which will be renamed Pfizer plc and is expected to maintain Allergan's existing Irish legal domicile, according to a press announcement by the two companies.