It was the best of times, it was the worst of times for companies to dodge taxes by moving to Ireland.
So far, results have been mixed for new Treasury Department rules designed to thwart deals known as "tax inversions," in which a U.S. company buys a company in Ireland or some other low-tax locale and moves its headquarters there to cut its tax bill.
Banana giant Chiquita on Tuesday stuck by a plan to merge with Irish rival Fyffes and relocate from Charlotte, North Carolina, to Ireland in one such deal. This came less than a week after Chicago-based pharmaceutical maker AbbVie abandoned a similar bid to buy Irish firm Shire specifically because of the new Treasury Department rules.
Chiquita's decision to press on with its inversion underscored the limitations of the new Treasury rules and the need for stricter laws that could raise more serious obstacles to inversions.
“We need stronger legislation that is more of a deterrent to do these deals by making it less lucrative to do these kinds of things,” Roger Hickey, the co-director of the nonprofit Campaign for America’s Future, told The Huffington Post on Tuesday. “We’re going to be pressuring Congress to act as soon as possible because we’re convinced that we don’t want to be doing this company by company.”
One way the new Treasury rules were effective was in prohibiting a scheme known as a "hopscotch loan," a way for multinational companies to tap cash held overseas by foreign subsidiaries without having to pay taxes on it. This strategy was a major reason for companies with a lot of money stashed abroad to go through an inversion deal. AbbVie’s inversion plans -- reportedly driven by the fact that a “significant portion” of its $10.2 billion in cash is stowed away overseas -- were dashed after the Treasury announced its new guidelines on Sept. 22.
But “earnings stripping,” another strategy used to shrink a company's U.S. tax bill, is still intact under the new rules. This is when a company with headquarters overseas lends a bunch of money to its U.S. subsidiary. Then, every time the U.S. subsidiary turns a profit, it sends that profit to its foreign headquarters as interest payments on the money it owes. Interest payments are partially tax-deductible under the U.S. tax code, so under that strategy, much of the company's U.S. profit is untaxed.
This means that under current law, ChiquitaFyffes -- the proposed new Irish parent company -- will be able to load the U.S.-based Chiquita up with debt, then wipe out most of its U.S. profits by absorbing them as interest payments on loans. Chiquita has only about $1.7 billion in cash overseas, so the end of hopscotch loans shouldn't bother it much. With earnings stripping still legal, Chiquita still has a financial incentive to go ahead with its inversion deal.
"In America, it’ll be making half of the payments it should be making to the American government because it’s making interest payments on the loans from the new foreign parent, which is really to itself," Frank Clemente, the executive director of the nonprofit Americans for Tax Fairness, told HuffPost.
Chiquita spokesman Steve Himes did not immediately respond to a request for comment.
To close this particular loophole, the Obama administration may need Congress’s legislative muscle. But that would mean going against the interests of Wall Street banks, which have raked in about $1 billion in fees on inversion deals in the past three years, according to Rebecca Wilkins, a senior counsel at the nonprofit Citizens for Tax Justice.
Given the cozy relationship between Wall Street power-brokers and the Republican Party, and the need for Democrats to raise money from those same financial giants, a strong legislative crackdown on other inversion incentives seems unlikely.
“In order for any legislation to get through Congress, they’ll have to stand up to multinationals and Wall Street,” Wilkins told HuffPost. “No to be cynical but,” she laughed, “I don’t know about that.”