The Obama administration will soon issue rules to prevent companies from setting up their headquarters in a lower-tax country, but they won’t stop executives from looking for ways out, Treasury Secretary Jack Lew warned Tuesday.
Testifying on his agency’s budget in the Senate on Tuesday, Lew suggested that he was nearing a third administrative effort to limit the benefits of so-called corporate inversions, but downplayed the impact the new rules could have and asked the senators to pass legislation instead.
“We are still looking at an additional action, senator, and it will help,” Lew told Sen. Dick Durbin, D-Ill. “But I don’t want to mislead — it will help, but it won’t shut the door completely” on inversions.
Corporate inversions have become a pressing topic on Capitol Hill as a number of U.S. companies, including the pharmaceutical giant Pfizer, have negotiated deals to buy companies in low-tax countries and move their headquarters there. Doing so allows them to avoid paying the 35 percent U.S. corporate income tax rate, the developed world’s highest, on overseas income.
One possible added benefit of such tax manuevers is that companies may be able to shift income from the U.S. to a lower-tax jurisdiction by loading the U.S. company up with tax-deductible debt, and making interest payments to the parent company in the lower-tax jurisdiction. That practice is known as “earnings stripping.”
In November, at the same time it introduced new rules meant to tighten the restrictions around inversions, the Treasury indicated that it might issue new rules aimed at preventing earnings stripping.
Together, the Treasury’s rules are meant to undercut the tax benefits companies can get from inverting. But Lew suggested Monday that while the previous efforts have seen some success, corporations are often able to find ways to avoid the tax rules.
“There’s a lot of tax professionals out there,” he said.
The ranking Democrat on the House Ways and Means Committee, Sander Levin, last month introduced legislation to prevent earnings stripping.
Republicans have opposed short-term measures to stop inversions, instead seeking a broader overhaul of international taxation to eliminate the incentives that push companies to seek to move their headquarters out of the country.
Lew cast the problem as a moral one, noting that companies in the U.S. benefit from taxpayer-funded research and development spending, infrastructure, education, and the rule of law. For companies to take advantage of those benefits but then move their headquarters overseas “may be legal, but it’s not right and we should change the law,” Lew said.
