'Inversion', The Latest Buzzword At The Intersection Of Wall St. And Washington

  on July 25 2014 2:16 PM
Obama economy
U.S. President Barack Obama delivers remarks at the White House Summit on Working Families at the Omni Shoreham Hotel in Washington June 23. Reuters/Larry Downing

President Obama this week joined the political discussion that's been brewing for some time in Washington about 'inversions', the latest wonky word to emerge from the intersection of Washing and Wall Street. On Thursday, he criticized companies that relocate to Ireland for tax purposes, accusing them of being unpatriotic and abandoning their US citizenship obligations.

In an interview with CNBC, Obama said that companies who abuse the system were taking advantage of "unpatriotic tax loopholes". 

Many companies seek to reduce their tax burden by relocating to countries with a lower tax rate. They do so by either buying another company in the target country and adopting its domicile, or by establishing a new company in the target country. This process, known as “inversion,” has been popular among many pharmaceutical companies in the U.S., which have overseas cash they don’t want to subject to the 35 percent corporate tax rate prevalent in the U.S., which is the highest in the world.

"If you are basically still an American company but you simply change your mailing address in order to avoid paying taxes then you are really not doing right by the country and its people," he told the broadcaster.

Obama echoed sentiments expressed by U.S. Treasury Secretary Jack Lew, who last week wrote a letter to Senate Financing Committee Chairman Ron Wyden. In it he called for a “new sense of economic patriotism," urging Congress to clamp down on the "abuse of our tax system." He also stated that U.S.-based companies should not be allowed to indulge in “inversion” transactions solely for the purpose of changing their tax status. 

In his letter, Lew also demanded that a legislation to limit corporate tax inversions be implemented retroactively from May. It isn’t yet clear whether the Obama administration is targeting inversion deals that were signed before but not closed by May, or only deals agreed upon since then.

On Thursday Obama said, "What we are trying to do is to say that if you simply acquire a small company in Ireland or some other country to take advantage of the low tax rate and you start saying, 'we are now magically an Irish company', despite the fact that you might have only 100 employees there and you have got 10,000 employees in the United States, you are just gaming the system. You are an American company."

He went on to say that there were many positives for companies that choose to stay true to their roots. "Companies thrive in the United States in part because they benefit from the best university system in the world, the best infrastructure," the president added. "There are a whole range of benefits that have helped to build companies, create value, create profits."

"For you to continue to benefit from that entire architecture that helps you thrive, but move your technical address simply to avoid paying taxes, is neither fair, nor is it something that's going to be good for the country over the long term."

Sean Martin and M Rochan of IBTimes UK  contributed to this story.

 

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