While many companies have been lauding President Donald Trump for the new tax bill, some companies involved in inversion deals — mergers with foreign firms that allow U.S. companies to lower taxes by moving their business abroad — are reporting consequences from those relocations.
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The latest provisions are expected to level the playing field with U.S. companies when it comes to how much is owed in taxes and prevent relocations moving forward.
A provision called the Base Erosion and Anti-Abuse Tax, for instance, limits the amount of interest and royalties U.S. subsidiaries are allowed to pay to foreign parent companies. This and other features of the new tax law will force inverted and other foreign-based companies sheltering U.S. earnings to pay about the same as their U.S.-based competitors, University of Houston Law Center tax professor Bret Wells told the Wall Street Journal.
The base erosion provision will also bring in an estimated $150B to the U.S. government over a decade, while an interest expense cap will garner $253B, the WSJ reports.
This is not the first time the U.S. government has attempted to discourage inversion deals. In 2016, the Obama administration took aim at earnings stripping — the process by which many inverted companies transfer their profits to lower-tax countries to save money — and effectively dashed a planned $150B merger between Pfizer Inc. and Allergan that would have taken its headquarters to Ireland, where the corporate tax rate is 12.5%.
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