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Treasury fights back against offshore tax shelters created by 'inversions'

President Obama on overseas inversion: "My attitude is I don't care if it's legal -- it's wrong."

By Matt Bradwell
President Barack Obama walks out of the White House with daughter Malia Obama to board Marine One on the South Lawn in Washington, D.C. on September 19, 2014. The First Family is traveling to Camp David for the weekend and is expected to return to the White House on Sunday. UPI/Andrew Harrer/Pool
President Barack Obama walks out of the White House with daughter Malia Obama to board Marine One on the South Lawn in Washington, D.C. on September 19, 2014. The First Family is traveling to Camp David for the weekend and is expected to return to the White House on Sunday. UPI/Andrew Harrer/Pool | License Photo

WASHINGTON, Sept. 23 (UPI) -- If an American company wants to grow in size but avoid the increased tax responsibility, one of the options it has is "inversion," merging with an overseas company and moving their headquarters to the nation of their new parent company.

"They're declaring they're based someplace else even though most of their operations are here," President Obama described in July. "My attitude is I don't care if it's legal -- it's wrong."

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On Monday, the U.S. Treasury Department took steps to curb lost tax revenue by issuing a number of new guidelines and regulations for overseas mergers to hopefully ensure American businesses enterprises grow ethically and without shortchanging the American people.

Under the new guidelines, if an American company merges with a foreign one, it will not be able to disguise American revenue in the form of a loan to its foreign parent company. Such loans are now considered property of the United States are therefore taxable in most cases.

Additionally, companies that unload large dividends just prior to merging to stay below the 80 percent foreign ownership threshold required for overseas tax relief will be taxed based on their equity prior to merging -- so no more last minute self-stripping to make a company appear smaller than it actually is.

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The biggest potential change is regulation of "passive assets" -- overseas non-business operations bankrolled by American partners. For example, if an American company wants to legally disguise $5,000, rather than reporting that $5,000 in revenue it can purchase $5,000 in securities or other investments for its foreign parent company. Monday's changes allow the government to tax those assets as revenue.

"These first, targeted steps make substantial progress in constraining the creative techniques used to avoid U.S. taxes," explained Treasury Secretary Jack Lew.

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