Monday, July 21, 2014

"Congress should shut down this abuse of our tax system.": US Treasury Secretary Jack Lew

US Treasury Wants Immediate Anti-Inversion Legislation
by Mike Godfrey,, Washington
21 July 2014

With reports of more American companies looking to use the
opportunity to move their headquarters abroad when bidding for overseas companies, the United States Treasury Secretary Jack Lew has written to Congressional leaders urging immediate action to pass legislation to prevent such corporate inversions.

"Corporate inversions" have been used by US companies when bidding for (generally smaller) foreign companies, as a means of moving away from the high American 35 percent corporate tax rate. Under current law, a company that merges with an offshore counterpart can move its headquarters abroad (even though management and operations remain in the US), and take advantage of the lower corporate tax rates in foreign jurisdictions, as long as at least 20 percent of its shares are held by the foreign company's shareholders after the merger.

In his letter to the Chairmen and Ranking Members of both the House of Representatives Ways and Means Committee and the Senate Finance Committee, Lew's opinion was that Congress should "enact legislation immediately – and make it retroactive to May 2014 – to shut down this abuse of our tax system."

He pointed out that such companies "are attempting to avoid paying taxes here, notwithstanding the benefits they gain from being located in the US," and that, while "the best way to address this situation through business tax reform that lowers the corporate tax rate," Congress needed to act now.

In response, Senate Finance Committee Chairman Ron Wyden (D – Oregon), who previously had, in fact, appeared to want – rather than a short-term measure – to deal with the issue within the framework of future comprehensive tax reform, confirmed that "this inversion loophole must be plugged. … I'm talking with my colleagues and exploring options for addressing this in [both] the near and long term."

Sander Levin (D – Michigan), the House Ways and Means Committee Ranking Member, and his brother, Chairman of the Senate Permanent Subcommittee on Investigations Carl Levin (D – Michigan), who have issued two companion bills that would include a proposal made by President Barack Obama in his 2015 budget proposals (and now plugged by Lew in his letter) to restrict inversions by putting the minimum foreign shareholding at 50 percent, issued further statements pressing for immediate action.

Sander Levin said that he "greatly appreciated Secretary Lew's call for immediate action to shut down this abuse of our tax system," while Carl Levin added that it was "clear that the wave of corporate inversions to avoid paying taxes is accelerating, and it is urgent that Congress act to close the loophole."

Chris Van Hollen (D – Maryland), Ranking Member of the House Budget Committee, concluded that "no one doubts that our tax code is broken in many ways, but we cannot use the need for broader tax reform as an excuse to do nothing as more and more companies use this tactic to avoid paying their fair share."

Republican lawmakers have, until now, appeared to agree with Wyden's previous position on inversions, that using tax reform to lower the corporate tax rate and having a more internationally competitive tax code would be the better longer-term option.

In fact, in his response to Lew's letter, Senate Finance Committee Ranking Member Orrin Hatch (R –Utah) emphasized his disagreement "with the Administration's position that we should enact punitive, retroactive policies designed to force companies to remain domiciled in the US. The idea of constructing a wall around US multinational companies carries risks of adverse consequences, including making US-based corporations enhanced targets for foreign takeovers, which will further erode our tax base. Moreover, any such wall would run the risk of quickly becoming porous through thin capitalization or spin-off activities."

However, while stressing the need for comprehensive corporate tax reform, Hatch appeared to leave the short-term policy option open by saying that "there may be steps Congress can take, short of comprehensive tax reform, to address corporate inversions and related issues. I'm certain we can find alternatives that could easily be enacted."