Calling for a “new sense of economic patriotism”, the Obama administration is urging Congress to act “immediately” to curb the significant growth in tax inversions.
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In a letter to the leaders of the congressional tax-writing committees, secured by FOX Business, Treasury Secretary Jack Lew, requests lawmakers “… enact legislation immediately – and make it retroactive to May 2014 – to shut down this abuse of our tax system.”
The inversion tax strategy involves a merger between a company based in the United States and another headquartered elsewhere. Following the merger’s completion, the combined company then bases itself outside the U.S. Federal law taxes corporations at the highest top rate in the industrialized world and on their worldwide profits, so a merged company usually realizes a significant reduction in its tax bill at a loss to the U.S Treasury.
This week, two more U.S. drug companies, Mylan and AbbVie, joined the growing list of firms to attempt the tax maneuver. The move was also reportedly a significant selling point for Pfizer (PFE) in its bid for AstraZeneca (AZN).
“… We should prevent companies from effectively renouncing their citizenship to get out of paying taxes,” wrote Lew.
In his letter, Lew endorses a Democratic proposal that would prohibit a company from moving its tax location without also changing the entity controlling the company. The bill is offered by Sens. Ron Wyden and Carl Levin and Congressmen Sander Levin and Chris Van Hollen and would mean about $19.5 billion dollars more to the U.S. Treasury over the next decade, according to an analysis of the legislation performed by the nonpartisan Joint Committee on Taxation.
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Specifically, their bill “increases the needed percentage change in stock ownership from 20% to 50% and provides that the merged company will nevertheless continue to be treated as a domestic U.S. company for tax purposes if management and control of the merged company remains in the U.S. and either 25% of its employees or sales or assets are located in the U.S.” according to the Democrats’ bill summary.
Senior Republicans said they share in the growing alarm over inversions, though differ on the appropriate remedy.
“The non-partisan experts that have looked at this policy say it doesn't solve the problem. Companies will continue to move overseas until we address the fact that we have the highest corporate rate in the industrialized world,” said Sarah Swinehart, a spokesperson, House Ways and Means Committee Chairman Dave Camp.
The Senate Finance Committee’s top Republican, Sen. Orrin Hatch, added in a statement that “it is misguided to think a short-sighted patch aimed only at alleviating a symptom of the broader problem will prevent companies from leaving the country.”
Even Senate Finance Committee Chairman Ron Wyden, a Democrat, seemed non-committal to his colleagues’ proposal. “This inversion loophole must be plugged. As the speed of inversions increases, this will only fuel bipartisan urgency to stop companies from deserting the US. I’m talking with my colleagues and exploring options for addressing this in the near and long term,” said Wyden in a statement.
Lew said the administration agrees Congress needs to overhaul the corporate tax code, though it should also enact tax inversion legislation to address the issue while lawmakers wrangle over the details of tax reform.
An overhaul of the broader tax code is very unlikely this year, according to senior congressional aides. Though House Ways and Means Committee Chairman Dave Camp has released his full discussion draft and despite the growing lipservice lawmakers have given the issue, the details remain too contentious to address in such a fractured Congress during an election year.
“If there are more inversion deals, while Walgreens is rumored to be the next, that would increase chances that the Senate might act, but I think chances of House action this year are really slim, no better than 10 or 20%, said Greg Valliere, chief political strategist at the Potomac Research Group.
It could offer Democrats another economic political issue going into the fall midterm elections, as Lew ended his letter with a familiar administration political phrase. “We know that the American economy grows best when the middle class participates fully and when the economy grows from the middle out,” Lew wrote. “We should not be providing support for corporations what seek to shift their profits overseas to avoid paying their fair share of taxes.”