The Obama administration announced regulatory steps Monday to deter U.S. corporations from merging with foreign companies and shifting their headquarters to countries with lower tax rates.
The new measures, which take effect immediately, would not prohibit the corporate practice known as “tax inversions.” But they would discourage it by making it harder for these companies to bring back foreign profits.
“To address this, today’s action eliminates certain techniques inverted companies currently use to access the overseas earnings of foreign subsidiaries of the inverting U.S. company without paying U.S. tax,” said Treasury Secretary Jacob Lew. “We’re also making it more difficult for companies to invert, by strengthening the requirement that the former owners of the U.S. entity own less than 80 percent of the new combined entity.”
The new rules could complicate high-profile inversions already in the works. These include North Carolina fruit grower Chiquita Brands International Inc, which is weighing a merger and inversion with Fyffes Plc., an Irish firm, and the purchase by Minnesota-based Medtronic Inc., the world's fourth biggest medical-device maker, of Irish manufacturer Covidien Plc.
The regulatory steps don’t need congressional action. They are not retroactive, however, and don’t attempt to reverse recent inversions. Legislation introduced in Congress offers retroactive fixes that have the effect of undoing the benefits sought by companies recently engaged in tax avoidance.
Monday’s action targets deals in which a former U.S. corporation that gets a new foreign parent company has a continuing ownership stake larger than 60 percent but below 80 percent, the threshold by which a company is considered a U.S. corporation for tax purposes despite it new corporate address.
The White House and Treasury Department on Monday both repeated calls on Congress to ban inversions, which they have said could result an estimated $17 billion in lost tax revenue over the next decade.
The Treasury Department announced the regulatory action 90 minutes after financial markets closed, and the White House weighed in almost immediately.
“While there’s no substitute for congressional action, my administration will act wherever we can to protect the progress the American people have worked so hard to bring about,” President Barack Obama said in a statement.
So-called corporate inversions involve U.S. corporations that move their tax residences overseas – on paper at least _ to take advantage of lower tax rates in countries such as Ireland, the British Virgin Islands and Bermuda.
The practice has been legal, but seldom used, for decades. In the last two years, however, there have been dozens of such deals consummated or in the works, many of them in the pharmaceutical sector.
Among the recent controversies over inversions was word that Burger King would buy Canadian fast-food giant Tim Hortons and move its headquarters across the northern border. The Walgreens drug store chain recently backed away from a planned inversion deal after intense media scrutiny.
The Obama administration prefers congressional action, but Republicans in the U.S. House insist the issue should only be addressed through a broad revamp and lowering of the corporate tax code.
“We’ve been down this rabbit hole before, and until the White House gets serious about tax reform, we are going to keep losing good companies and jobs to countries that have (reformed) or are actively reforming their tax laws,” Rep. Dave Camp, R-Mich., chairman of the House Ways and Means Committee, said in a statement.
Camp, who heads the panel through which all tax legislation originates, accused the administration of taking regulatory steps in order to help Democrats campaign on an anti-corporation theme in coming Congressional elections. Camp earlier this year released his own comprehensive plan to overhaul the corporate tax code but House Speaker John Boehner, R-Ohio, captured the headlines by dismissing it as “blah, blah, blah.”
Reaction from some members of the Senate was more favorable – and more bipartisan. Democratic Sen. Ron Wyden of Oregon, chairman of the Senate Finance Committee, and the panel’s top Republican, Sen. Orrin Hatch of Utah, issued a joint statement expressing concern about the uptick in corporate inversions and the drain of billions of dollars in lost tax revenue.
Wyden and Hatch have been working on a legislative plan that would link any quick curbs on inversions to future action lowering the corporate tax rate.
Obama used a speech this summer in Los Angeles to lay the political groundwork for Monday’s regulatory action.
“They’re technically renouncing their U.S. citizenship. Some people are calling these companies corporate deserters,” Obama said. “I don’t care if it’s legal. It’s wrong.”
Lesley Clark and Greg Gordon contributed