The Obama administration cracked down Monday on certain overseas corporate mergers and acquisitions, aiming to curb American companies from shifting their ownership abroad to shirk paying US taxes.
New regulations from the Treasury Department will make these co-called corporate inversions less lucrative by barring creative techniques that companies use to lower their tax bill. Additionally, the US will make it harder for companies to move overseas in the first place by tightening the ownership requirements they must meet.
"This action will significantly diminish the ability of inverted companies to escape US taxation," Treasury Secretary Jacob Lew said. He added that for some companies considering inversions, the new measures would mean inverting would "no longer make economic sense."
Administration officials who briefed reporters could not say how many pending inversions might be stopped by the new rules and specifically would not address whether the rules would block one of the most high-profile moves, an effort that Burger King announced in August to acquire Tim Hortons, a Canadian coffee and doughnut chain.
In such transactions, a US business merges with or is acquired by a foreign company in a country with a lower tax rate. President Barack Obama has denounced inversions as unpatriotic and has urged Congress to stop them.
Obama applauded the Treasury for taking steps to reverse the trend of companies seeking to "exploit this loophole" to avoid paying their fair share in taxes. Yet he said he was still calling on Congress to pursue broader tax reform that would reduce the corporate tax rate, close loopholes and make the tax code simpler.
"While there's no substitute for congressional action, my administration will act wherever we can to protect the progress the American people have worked so hard to bring about," Obama said in a statement.
Coming just six weeks ahead of Election Day, the timing of Monday's announcement highlighted the appeal Democrats believe the issue has with voters. By having Treasury announce new steps now, the White House was practically daring Republicans to voice their opposition.
The announcement puts companies on notice that Treasury will be drafting regulations to clamp down, but the new measures will take effect immediately even while those regulations are pending. That means any transactions from Tuesday onward will be subject to the tougher restrictions.
Three new measures will seek to stop companies from finding ways to access earnings from a foreign subsidiary without paying US taxes, including "hopscotch" loans, in which companies shift earnings by lending money to the new foreign parent company while skipping over the US-based company.
Another rule change would make it harder for merged or acquired companies to benefit from lower foreign taxes by tightening the application of a law that says the American company's shareholders must own less than 80 percent of the new, combined company. The administration would like to reduce that percentage to 50 percent, but that will require legislation. In the absence of legislation, the administration says its new rules will make it harder for companies to get around the 80 percent requirement by prohibiting certain arrangements, such as a firm making large dividend payments ahead of the acquisition to reduce its size on paper.
About 50 US companies have carried out inversions in the past decade, and more are considering it, according to the nonpartisan Congressional Research Service. The recent wave of inversions has been dominated by health care companies, including drugmaker AbbVie, which has announced plans to merge with a drug company incorporated in Britain.
Treasury called the new rules a "targeted action" aimed at ensuring that the US tax system only provides incentives to genuine cross-border mergers that strengthen the economy.
Democrats generally supported the action as the best the administration could do without action from Congress while Republicans faulted the administration for not making a greater effort to work with Congress to enact comprehensive corporate tax reform.
"The administration has made a good effort but administrative action can only go so far," Sen. Chuck Schumer, D-N.Y., said in a statement. "This rule makes some companies think twice before inverting, but legislation is sorely needed."
Republicans pointed out that the US has the highest corporate tax rate in the developed world and argued that Obama should be pursuing efforts to simplify the tax code, not punish companies.
"We've been down this rabbit hole before and until the White House gets serious about tax reform, we are going to keep losing good companies and jobs to countries that have or are actively reforming their tax laws," said Rep. Dave Camp, R-Mich., who chairs the tax-writing House Ways and Means Committee.
Rep. Sander Levin, the top Democrat on Ways and Mean spoke out in favor of the Treasury taking steps "to serve notice" to corporations evading taxes by repatriating overseas, ahead of Congressional measures, at a Monitor-hosted breakfast for reporters.
“It is unavoidable that tax inversions will have to be addressed, unavoidable. Because you can’t have a system where a structure is easy to evade and to essentially turn it on its head,” Representative Levin told reporters.
Several Democrats in Congress have announced bills to make it harder for US corporations to carry out inversions, and Obama included provisions in his 2015 budget request to limit inversions.
Obama elevated the issue in July, demanding "economic patriotism" from US corporations that use legal means to avoid US taxes through overseas mergers. "I don't care if it's legal," Obama declared at the time. "It's wrong."
AP Economics Writer Martin Crutsinger and AP writer Alan Fram contributed to this report.
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