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Beyond Foiling Pfizer, U.S Aims at Intra-Company Loans `Fiction'

Escalating a 19-month regulatory assault against U.S. companies’ shifting their tax addresses offshore, President Barack Obama’s administration last week also went after companies that have always been overseas.

A proposed regulation from the Treasury Department targets loans that foreign companies make to their U.S. subsidiaries -- a technique that loads the American units with tax-deductible interest payments while shifting their profits offshore.

The rule is aimed at so-called earnings stripping -- which Treasury officials call a key strategy employed by U.S. companies that have completed “inversions,” the transfer of their tax addresses to lower-tax countries. But it would also apply to any bona fide foreign firm that has a U.S. subsidiary, ranging from manufacturers and distributors to private-equity firms and hedge funds, according to tax lawyers and academics.

The provision “is absolutely breathtaking, very elaborate and very far-reaching,” said H. David Rosenbloom, an international tax lawyer at Caplin & Drysdale in Washington, and a former senior Treasury Department tax official. “This regulation uses inversions as an excuse to do something way beyond inversions.”

‘Profound Impact’

The proposed rule "could have a profound impact on a range of modern treasury management techniques," Big Four accounting firm PricewaterhouseCoopers wrote in a research note last week. Treasury officials say the proposal is designed to catch intra-company loans that don’t result in net new investments in the U.S.

The lending provision was overshadowed in the days following Treasury’s April 4 announcement by the cancellation of a $160 billion merger between Pfizer Inc. and Allergan Plc. That deal, which would have created a new company with a tax address in low-tax Ireland, ended over another new rule that would limit companies’ ability to participate in inversion transactions if they’ve already done them within the past 36 months...