The Obama administration announced executive steps on Monday to curb the manoeuvre known as tax “inversions,” by which companies slash their tax bills by moving their companies’ tax bases overseas.
On a conference call with reporters Monday evening, Treasury Secretary Jack Lew said the administration was taking executive action since it had become clear Congress would not address the issue this year. He said the steps would make companies “think twice” about the manoeuvre.
“We’ve recently seen a few large corporations announce plans to exploit this loophole, undercutting businesses that act responsibly and leaving the middle class to pay the bill, and I’m glad that Secretary Lew is exploring additional actions to help reverse this trend,” President Barack Obama said in a statement.
The new regulations will go into effect immediately, senior administration officials said Monday. Lew said on the call that they are aimed at reducing the benefits of and, “when possible,” stopping inversions.
The actions unveiled on Monday eliminate certain techniques inverted companies currently use to gain tax-free access to the deferred earnings of a foreign subsidiary, which officials said would “significantly diminish” the ability of inverted companies to avoid US taxation. The moves also erect more barriers to inversion by strengthening a requirement in the tax code that former owners of a US company own less than 80% of the combined entity.
So-called tax “inversions” have become a corporate trend over the past year, as companies have either acquired rivals or merged with them to relocate their headquarters to a foreign country with lower corporate tax rates.
Their increased usage has prompted Obama to call companies unpatriotic for exploiting the tax loophole and urge Congress to address the problem. The most prominent recent example of a corporate inversion came when Burger King announced it would acquire Canadian coffee and doughnut chain Tim Hortons and move its base to Canada.
Democrats have sought to use the issue as fodder ahead of November’s midterm elections, but the issue has so far failed to resonate with voters. It has been complicated by investors like Warren Buffett, who is normally sympathetic to the Democratic position on tax issues but whose company is providing financing to complete the Burger King-Tim Hortons deal.
Republicans support addressing inversions but prefer to do it as part of a broader overhaul of US corporate tax policy. In a statement, a spokesman for House Speaker John Boehner blasted the administration’s executive move.
“Under President Obama, the United States has the highest corporate tax rate in the developed world,” said Michael Steel, Boehner’s spokesman. “The answer is to simplify and reform our broken tax code to bring jobs home — and help grow our economy and create even more American jobs.”
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