WASHINGTON (AP) — The Obama administration’s decision to curb the ability of U.S. corporations to skirt taxes by merging with foreign companies kicked off an immediate election-season debate over when and how to tackle the nation’s complex corporate tax code.
Following through on a populist appeal from President Barack Obama for a new era of “corporate patriotism,” the Treasury Department stepped in Monday with new regulations designed to limit the ability of U.S. firms to seek refuge in lower tax countries.
The Treasury will make these so-called corporate inversions less lucrative by barring creative techniques that companies use to lower their tax bill. Additionally, the U.S. 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 U.S. 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.”
The Treasury steps sparked a prompt partisan reaction.
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 U.S. 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.
In a display of bipartisanship, Senate Finance Committee Chairman Ron Wyden, D-Ore., and the committee’s top Republican, Orrin Hatch of Utah, said they were committed to putting together a stopgap measure to reduce the benefits of tax inversions that could win support from both parties.
More difficult, however, is developing more comprehensive tax legislation that reduces tax rates but also gets rid of cherished tax breaks that have effectively reduced the tax payments of many corporations operating in the United States. Many Democrats want changes to result in higher tax revenue, while Republicans prefer an overhaul that leaves overall corporate tax revenue essentially the same.
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.
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 U.S. taxes, including “hopscotch” loans, in which companies shift earnings by lending money to the new foreign parent company while skipping over the U.S.-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 U.S. 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.
AP Economics Writer Martin Crutsinger and AP writer Alan Fram contributed to this report.