New Government Regulations On Fiduciary Standard, Tax Inversions
April 08, 2016
Obama administration announces new regulations requiring retirement advisers to always act in the best interest of their client in a new rule known as the fiduciary standard; The Treasury released new more aggressive and expansive guidelines regarding tax issues related to inversions, which is when companies complete a merger or acquisition in order to move their legal residence offshore to reduce tax payments.
- The Obama administration announced new regulations this week requiring retirement advisers to always act in the best interest of their client. The White House said that the regulations will save families $17 billion per year, but critics claim that it will hurt ordinary investors by making financial advice more costly. The new rule is known as the fiduciary standard and is aimed at eliminating conflicts of interest among financial advisers who steer clients into investments that produce weaker returns for investors but larger fees for brokers. Secretary of the Treasury Jack Lew said that the new regulations are “an important step toward ensuring that Americans who invest their hard-earned retirement savings receive advice that is in their best interests.” The Council of Economic Advisers estimates that investors lose as much as $17 billion annually because financial advisers are more concerned about the fees they receive than getting the best returns for their clients. Republican lawmakers and analysts say the action will hurt investors by making financial advice more expensive, due to extra paperwork and compliance requirements. [Washington Times]
- The Treasury released new administrative guidelines regarding tax issues related to inversions, which is when companies complete a merger or acquisition in order to move their legal residence offshore to reduce tax payments. The guidelines include new approaches to multistep acquisitions and earnings-stripping, more aggressive and expansive than the Treasury’s earliest regulations. In Section 7874 of the tax code, Congress has set out statutory hurdles that companies must clear to achieve the tax benefits. As a simplification, if the shareholders of a foreign acquirer own less than 20 percent of the combined entity after the acquisition, then the tax code simply disregards the acquisition for purposes of determining residency of the combined entity, and as a result, the purported inversion does not go through. If the shareholders of a foreign acquirer own more than 20 percent but less than 40 percent of the combined entity, and the foreign acquirer conducts substantial business activities in the foreign jurisdiction, then the inversion technically works, and if the shareholders of the foreign acquirer own more than 40 percent of the combined entity, the inversion works and most negative consequences are avoided. After the new regulations were announced, the large Pfizer-Allergan merger was scrapped. [NYTimes]