The Barack Obama administration on Tuesday called for immediate legislation to prevent U.S.-based companies from re-incorporating overseas for lower taxes, the Wall Street Journal reported Tuesday.
Treasury Secretary Jacob Lew wrote a letter to Senate Financing Committee Chairman Ron Wyden on Tuesday and 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.
The White House had earlier proposed similar steps in the budget and called for broad reforms in corporate taxation. In his letter, Lew added that the “President had called for undertaking business tax reforms as a way of improving the investment climate in the U.S.” He also stated that there was a need to lower the corporate tax rate in the country to make the investment climate in the country more "business-friendly."
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.
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. Such a law would apply to U.S drug maker AbbVie’s (NYSE: ABBV) deal with Ireland-based Shire (NASDAQ: SHPG) and Mylan’s (NASDAQ: MYL) pending deal for Abbott Laboratories' (NYSE: ABT) overseas generics business.
Fearing unfavorable legislation, many companies have reportedly been adding clauses to merger agreements that would allow them to walk away without paying a penalty if the tax advantage is suddenly taken away. About 50 U.S. firms have reincorporated overseas through inversions in the last 10 years, the Journal reported.
Another report from the Journal, citing the findings of a Congressional research panel, stated that the U.S. would have received an additional $20 billion over the past decade through corporate taxes, if inversions had not taken place.