We can expect more crackdowns by federal regulators concerning taxing of U.S. companies doing business overseas. The U.S. Treasury recently proposed a series of regulations. The intent of such rules is to make it more difficult for companies to reduce the amount of taxes owed by the practice of shifting profits to foreign companies. The White House Office of Management and Budget (OMB) now will have 90 days to decide whether to finalize these regulations, or to return the rules to the U.S. Treasury for further review.
It is common for businesses to acquire a small foreign company in countries with lower taxes. This allows the company to reduce taxes through tax inversion - the paying of foreign tax rates on particular income rather than paying of higher U.S. rates. One treasury spokesman refers to this practice by U.S. companies as "earnings stripping."
As we have seen in recent years, authorities have been taking extensive action to regulate such activity. However, regulation of such a practice remains controversial. Businesses complain that such a practice can result in a number of unintended harms. There are also concerns that these regulators may be overstepping their legal authority when attempting to pass such rules. Congress in particular has been critical of the Obama administration regarding this practice.
Without question, companies want to avoid the accusation of tax evasion. When federal regulators rule that companies are guilty of evasion, the penalties are extremely harsh. Because of the penalties, it is often necessary for businesses to seek the assistance of knowledgeable tax attorneys who can protect the company's rights. Due to the complex nature of such cases, it is too difficult for a company to defend itself successfully.