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U.S. IRS to tighten rules on tax-avoidance deals

April 28, 2014

By Kevin Drawbaugh

(Reuters) – Corporate tax-avoidance maneuvers known as “Killer B” deals would be even harder to do than they already are, under new rules that the U.S. Internal Revenue Service said on Friday it will issue along with the Treasury Department.

Under tax law, U.S. multinational corporations can indefinitely shelter profits they earn overseas from federal income taxes if they leave the profits offshore; if they bring those profits into the United States, tax is due.

As a result, more than $2.1 trillion in foreign profits were parked offshore as of last year, according to private research.

The mountain of earnings stashed abroad has been growing for years, but some corporations a few years ago found a way to bring home some of those earnings without paying tax.

Named after a section of the tax code with a “B” in it, Killer B deals involved an offshore unit buying shares of stock in its U.S. multinational parent with overseas profits that had been held overseas. Since the cash or assets changed hands as a payment for shares, instead of being a distribution, no tax was due.

The shares acquired by the foreign unit would then be used as currency to make a foreign acquisition.

The technique could also be used in reverse, with a foreign corporation selling shares to a U.S. unit for use in a reorganization, avoiding payment of U.S. withholding tax.

The IRS cracked down on Killer B’s in mid-2008 by requiring such cash and asset transfers to be treated as taxable distributions. The additional rules that the tax agency just announced will tighten and further clarify those 2008 measures.

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