U.S. seeks legislation to curb offshore tax deals

Obama administration wants to halt American companies from cross-border mergers to escape taxes

Jul 16, 2014 @ 12:15 pm

The Obama administration called for immediate congressional action to stop U.S. companies from using cross-border mergers to escape the country's tax system, the latest trend in corporate deal-making.

In a letter calling for a “new sense of economic patriotism,” Treasury Secretary Jacob J. Lew said Congress should pass tax changes retroactive to May.

“We should prevent companies from effectively renouncing their citizenship to get out of paying taxes,” Mr. Lew wrote in the letter to top congressional tax writers, which was dated yesterday and obtained by Bloomberg News. “We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.”

The mergers used to legally avoid taxes, known as inversion transactions, have become increasingly popular over the past year, particularly in the pharmaceutical industry. Companies including Minneapolis-based Medtronic Inc. (MDT) and Canonsburg, Pa.-based Mylan Inc. (MYL) have announced plans to move their legal addresses outside the U.S.

Pfizer Inc., based in New York, attempted to move its tax address to the U.K. by purchasing London-based AstraZeneca Plc. (AZN)

Mr. Lew's letter may not be enough to prompt Congress to move quickly. Three Senate Finance Committee Republicans -- Orrin Hatch of Utah, Mike Crapo of Idaho and Rob Portman of Ohio -- said in interviews today they had no interest in moving stand-alone legislation to stop inversions.

'VERY DISAPPOINTED'

“I would be very disappointed if the administration believes the answer to dealing with companies going offshore is to make it harder to be an American company,” Mr. Portman said, adding that the proposal would encourage companies in other countries to buy U.S. businesses and push jobs overseas. “We need tax reform.”

Congressional Democrats, including Rep. Sander Levin and Sen. Carl Levin of Michigan, have introduced bills that echo the administration's approach. Those measures haven't advanced because of Republicans' insistence that any changes be made as part of a broader revamp of the tax code that isn't likely to happen until 2015 at the earliest.

Mr. Lew's letter doesn't change the fundamental political dynamics at play or increase the likelihood of significant policy changes, Henrietta Treyz of Height Analytics LLC wrote today in a note to clients.

NO CHANGE

“Absent a major catalyst from the business community, such as additional announcements by major, longstanding American companies that they are also considering inversion, we do not see the two parties coming together this election year to enact a significant change to the tax code,” she wrote.

In inversions, U.S.-based businesses purchase a foreign company, then switch the legal address to take advantage of the foreign jurisdiction's favorable tax rules. In many cases, the companies' executives remain in the U.S.

More recent deals, including Medtronic's merger with Dublin-based Covidien Plc (COV), include clauses that allow the companies to walk away if Congress changes the tax law.

The administration and lawmakers in both parties favor tax-code changes that would lower the 35% corporate rate and tighten international tax rules. They've been unable to agree on the details or on changes to individual taxation.

'BIPARTISAN URGENCY'

Senate Finance Chairman Ron Wyden, an Oregon Democrat, said in a statement today, “This inversion loophole must be plugged. As the speed of inversions increases, this will only fuel bipartisan urgency to stop companies from deserting the U.S.” He said he was considering ways to address the matter “in the near and long term.”

Earlier, Mr. Wyden had supported a retroactive bill on corporate inversions though he wanted to wait to enact it until broader tax law changes were made. He later said at a July 14 interview at Bloomberg headquarters in New York that he had one foot in both camps and could see a rationale for moving quickly.

“If there's one of these every 72 hours there's going to be a pretty big drumbeat to do something quickly,” Mr. Wyden said then.

The U.S. House of Representatives voted 221-200 last week to bar companies that have moved their legal address to Bermuda or the Cayman Islands from getting some federal contracts. That would affect only a few companies at most.

SPENDING BILLS

The House has now adopted similar amendments on four spending bills, and the Senate included anti-inversions language in a defense spending bill yesterday. None of those measures has become law.

A Bloomberg News investigation found that existing and past limits have had little or no effect on companies' ability to win contracts.

Mr. Wyden's panel plans a July 22 hearing on international taxation, including inversions. He hasn't said whether or when he would attempt to advance legislation.

The Obama administration has proposed making it effectively impossible for a U.S.-based company to purchase a smaller foreign competitor and take that other company's address. The proposal would raise $17 billion over the next decade, according to the administration.

The current law, written to address a previous round of inversions in 2001 and 2002, lets U.S.-based companies carry out such transactions if the foreign partner owns at least 20% of the stock of the combined company.

U.S. companies are treated as domestic unless they undergo a merger in which shareholders of the foreign company end up with at least 20% of the combined company's stock. The administration plan would raise that threshold to 50%.

Mr. Lew, speaking today at a conference in New York, said that the government doesn't have the authority to address inversions with regulations and needs congressional action.

Mr. Lew's letter was first reported by the Wall Street Journal.

The Levin bills are S. 2360 and H.R. 4679.

(Bloomberg News)

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