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Jacob Lew warns failure to quickly limit inversions imperils tax reform

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With tax inversions happening at 'breakneck speed,' Lew says timely, retroactive legislation is needed

Failure by Congress to move quickly to limit companies from shifting their headquarters offshore endangers comprehensive business tax reform, Treasury Secretary Jacob J. Lew warned in ramping up pressure on lawmakers.

So called tax inversions, in which a U.S. firm buys a foreign competitor and restructures in a lower-tax nation, have been occurring at "breakneck speed," Lew said in an opinion column in Monday's Washington Post.

President Obama and Lew have focused on inversions in recent days, calling for companies to have more "economic patriotism." Democrats appear poised to make corporate tax-avoidance an issue in the congressional midterm elections this fall.

There is bipartisan consensus that the tax code needs to be overhauled to lower the high U.S. corporate rate of 35% that encouraged firms to seek offshore tax shelters. Republicans want to limit inversions as part of an overhaul.

The Obama administration and key congressional Democrats agree that's the best way to deal with the problem. But with the reform process moving slowly, action is needed now to limit inversions, they said.

Lew said in the column that he's concerned so much future tax revenue will be lost in the wave of inversions that it would make it more difficult to lower the corporate rate.

"While the business-tax-reform process moves steadily forward, the pace of inversions is increasing at breakneck speed," Lew said.

"We must confront this problem now, before our tax base is so eroded as to damage the prospects of comprehensive reform," he said.

Another potential tax inversion deal appeared to be in the works Monday. Drug-maker Hospira of Lake Forest, Ill., reportedly is a bidder for the medical nutrition unit of French food-products company Danone.

If Hospira makes the purchase, the company could shift its headquarters to Europe for tax reasons.

There have been about 50 inversions over the last decade, with the pace quickening in recent months.

On July 18, U.S. drug maker AbbVie Inc. struck a deal to buy European rival Shire for $55 billion in the biggest inversion to date.

AbbVie said it would reincorporate on the British island of Jersey, which does not tax most corporate earnings, allowing the company to significantly reduce its overall tax rate.

President Obama wants legislation that would make inversions more difficult by requiring a company to have at least 50% foreign ownership instead of the current 20% in order to be considered foreign for U.S. tax purposes.

Obama wants the new limits to be retroactive to May, when Democrats in the House and Senate introduced bills based on his proposal. Sen. Orrin Hatch (R-Utah), the top Republican on the tax-writing Senate Finance Committee, said last week he opposed retroactive legislation.

Lew said Monday that Congress has made legislation retroactive before, including a 2004 law that limited tax inversions.

"For legislation to be effective, it must be retroactive," Lew said. "The alternative — legislation taking effect after the president signs it into law — could have the perverse effect of encouraging corporations to act more quickly, negotiate new deals and rush to close those transactions before the bill is enacted."

Passing inversion-limiting legislation that is not retroactive would spur "a race against the clock and encourages more, not fewer, inversions," Lew said.

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