Corporate tax inversions have been a hot political topic in the United States, especially when Burger King announced that it would merge with Canada’s iconic coffee chain Tim Hortons. President Obama has urged corporations to refrain from taking advantage of this loophole, while Treasury Secretary Jack Lew has repeatedly recommended Congress to close down this measure.
It has been reported that the Obama administration will soon announce what action it will take to begin reining in on U.S. companies that participate in this growing trend in the private sector. Any steps would be added into the 2015 fiscal budget.
New York Democratic Senator Chuck Schumer proposed legislation that would crack down on U.S. companies that merge with foreign entities to gain tax advantages. The plan would see the federal government curb these tax incentives to invert by cutting the amount of deductible interest for inverted companies to 25 percent of U.S. taxable income from the original 50 percent. It would also crack down on earnings stripping, a process of reducing taxable income of a corporation by paying a large amount of interest to third parties.
The proposed legislation would possibly overturn corporate inversions and be retroactive as far back as Apr. 1994, according to draft documents obtained by Reuters.
Senator Schumer’s proposal could still be revised as the Democratic leadership is weighing a number of different options it could take. Whatever route the Congress takes it could very well lead to legal implications as corporations that have already initiated and completed inversion deals would likely take the issue to court.
According to the Congressional Research Service (CRS), nearly 100 U.S. companies have participated in corporate inversions in the past two decades. A substantial number of inversions have been carried out by the healthcare industry, including Abbvie, which will merge with a fellow drug company located in the United Kingdom.
Other data from Moody’s shows that U.S. corporations have billions offshore.
Lew issues warning
Speaking in Washington on Monday at a think tank, Lew suggested to lawmakers on both sides of the aisle to pass anti-inversion legislation in order to fight against the potential tidal wave of U.S. companies moving and setting up shop in foreign countries where they can lower their tax bill.
Lew reiterated the president’s attempts to diminish the attractiveness of inversions by imposing regulatory measures. Lew promised that the Treasury Department would soon bring forward new regulations, but noted that it is not a plausible alternative to the legal framework that the Democrats and Republicans can establish to weaken the impact of inversion agreements.
“Still, the administration is clear-eyed about the possibility that Congress may not move as quickly as necessary to respond to the growing wave of inversions,” Lew said in a speech at the Urban Institute. “Given that, the Treasury Department is completing an evaluation of what we can do to make these deals less economically appealing, and we plan to make a decision in the very near future.”
John M. Samuels, a former Treasury official, reportedly stated that regulations wouldn’t necessarily be the answer because then transactions would just transform into another type of matter that can easily be circumvented by corporations. Stephen Shay, a former Treasury official, meanwhile, suggested limiting the use of earnings stripping.