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Lew pushes Congress for action on corporate offshore tax ‘inversions’

Tax inversions
Treasury Secretary Jacob J. Lew speaks Thursday at the Treasury Department in Washington.
(Shawn Thew / EPA)

The Obama administration is close to finishing an evaluation into executive action to make a recent rise in corporate offshore tax shifting “less economically appealing,” but the best way to limit the maneuver is with legislation, Treasury Secretary Jacob J. Lew said Monday.

Lew said it was “imperative” that Congress act to limit so-called tax inversions, in which a U.S. company buys a smaller foreign rival and moves its headquarters there to take advantage of  lower taxes.

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FOR THE RECORD

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An earlier version of this post said Burger King Worldwide Inc. announced it would shift its headquarters to Canada for tax purposes. The company said the decision to move the headquarters of the combined firm to Canada was not driven by the nation’s lower tax rate but because it would be the largest market.

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Lew delivered his message in a speech to the Urban Institute think tank as lawmakers returned to Washington on Monday from their summer recess. 

Democratic legislation is stalled in the House and Senate because of Republican insistence the issue be addressed as part of a broad overhaul of corporate taxes.

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The Obama administration also would like to deal with the issue through such an overhaul, Lew said.

But with inversions happening more frequently, “we cannot wait to complete business tax reform before taking action to fix this problem,” he said.

Treasury officials have been looking into possible regulatory steps and are “completing an evaluation of what we can do to make these deals less economically appealing,” Lew said.

A decision will be made “in the very near future,” he said.

But there are limits to what the administration can do without legislation, Lew admitted.

“Any action we take will have a strong legal and policy basis, but will not be a substitute for meaningful legislation — it can only address part of the economics,” Lew said. “Only a change in the law can shut the door, and only tax reform can solve the problems in our tax code that leads to inversions.”

Inversions by U.S. companies have become more popular as many nations have taken steps to be more business-friendly, leaving the U.S. with the highest corporate tax rate among developed economies.

In recent weeks, Miami-based Burger King Worldwide Inc. announced it would shift its headquarters to Canada after the purchase of Tim Hortons Inc., and Illinois drugmaker AbbVie Inc. said it would reincorporate on the British island of Jersey after buying European rival Shire.

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The Obama administration has been sharply critical of such moves, in which a domestic firm remains largely in the U.S. but its address changes for tax purposes.

The White House wants new limits that would apply to any inversions that took place since April.

“This practice allows the corporation to avoid their civic responsibilities while continuing to benefit from everything that makes America the best place in the world to do business—our rule of law, our intellectual property rights, our support for research and development, our universities, our innovative and entrepreneurial culture, and our skilled workforce,” Lew said Monday.

“This may be legal, but it is wrong, and our laws should change,” he said, echoing comments in July calling for U.S. companies to show “economic patriotism.”

It’s unclear what executive actions can be taken that would discourage inversions. Any steps short of changing the law are likely to be “relatively symbolic and toothless,” said Chris Krueger, a senior analyst at financial services firm Guggenheim Partners.

But talk of new retroractive limits on inversions is causing corporations to reconsider such moves, he said.

Sens. Charles Schumer (D-N.Y.) and Richard Durbin (D-Ill.) are expected to propose new legislation this week aimed at reducing interest deductions for inverted companies. The bill would apply to companies that inverted since 1994.

Republicans probably will block a vote and chances of any stand-alone inversion legislation passing this year is less than 10%, Krueger said.

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