Treasury Secretary Jack Lew said Monday evening that the agency would change several tax rules to stop companies from buying smaller, foreign firms and then moving out of the U.S.
In a highly anticipated executive action, Lew said the Treasury Department was taking “initial steps that we believe will make companies think twice” about moving their headquarters abroad for tax purposes.
The measures, which Lew called “targeted action to meaningfully reduce the economic benefits” of inversions, will apply to any deals that are completed after Monday — that means they could affect pending mergers between U.S. and foreign companies.
The rules will have two main effects: Tightening the existing legal requirements on inversions, and preventing companies from using inversions to access foreign-held profits without paying U.S. taxes on them.
Current law prevents U.S. companies from simply claiming a mailbox in a low-tax country as their headquarters by requiring that the former owners of the U.S. company own less than 80 percent of the new company. Monday’s action would prevent companies from trying to get around that rule by artificially inflating the size of the target foreign firm or by making their U.S. business smaller by paying out extraordinary dividends right before inverting.
The rules introduced Monday also would prevent companies from accessing profits held abroad without paying U.S. taxes on them by undergoing an inversion. Currently, U.S. companies hold more than $2 trillion in such funds overseas. By essentially treating an inverted firm as a U.S. business for the purposes of distributing overseas profits, a senior Treasury official said, the action will “substantially reduce the economic benefits to firms that have inverted.”
The official added that the Treasury will continued to review ways to curb inversions, but cautioned that executive action was only the third best approach to stopping inversions, behind comprehensive tax reform that would lower the U.S. corporate tax rate and short-term legislation from Congress targeted to stop inversions.
President Obama applauded the move, saying that “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.”
Investors and legislators have expected executive action to stem inversions for weeks, although the Treasury has kept the timing and details of its plans under wraps. Lew initially said in July that the Treasury did not have authority to address inversions unilaterally. In August, however, Treasury officials began reviewing a range of actions they thought would be within their authority.
Pressure for the Obama administration to act grew over the summer as Congress failed to act on legislation and Burger King announced that it would merge with Canadian doughnut and coffee chain Tim Hortons and move to Canada.
Top congressional Republicans have challenged the Treasury’s legal power to issue regulations that could meaningfully alter businesses’ decisions regarding inversions and immediately reacted to Monday’s announcement with criticism.
A spokesman for House Speaker John Boehner said that “under President Obama, the United States has the highest corporate tax rate in the developed world. 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.”
House Ways and Means Committee Chairman Dave Camp challenged the effectiveness of the Treasury’s actions, saying that “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, adding that a “few campaign style speeches and stopgap measures from Treasury won’t do it.”
