While heeding the call for eventual comprehensive tax reform that would lower
the high United States corporate tax rate, Treasury Secretary Jack Lew has called
for immediate action from Congress to halt the flow of US multinationals undertaking
In a speech to the Urban Institute in Washington, Lew agreed that, despite
the US having the highest corporate tax rate in the developed world, "because
of inefficiencies and special-interest loopholes, some businesses pay the full
rate and others pay nothing at all." He reiterated that the Administration
wants to "eliminate wasteful and inefficient carve-outs and tax expenditures,
broaden the base, and establish a top rate of 28 percent."
"The guiding principle of our framework for business
tax reform," he added, "is to create an environment where businesses decisions are made for
business reasons – not for tax purposes."
However, he noted that, "although both Democrats and Republicans agree
that the ultimate goal of reform should be to increase America's competitiveness,
and that the path to get there is by closing unfair loopholes that do not help
our economy, it is going to take more time for Congress and the Administration
to complete tax reform and, while that happens, there is one loophole that should
be shut down immediately."
He said he has no quarrel with "genuine cross-border mergers," and identified
the problem as "when the change in residence is done primarily for tax
purposes, and the new entity is, for all intents and purposes, effectively just
changing its address. … This may be legal, but it is wrong, and our laws
should change. … By effectively renouncing their citizenship but remaining
here, these companies are eroding America's corporate tax base."
He said: "The best way to address inversions is through
comprehensive business tax reform that includes specific anti-inversion provisions.
These provisions will need to be in place even after we move to a reformed business
tax system because there will always be countries with rates lower than ours
where corporations can establish residences for tax purposes. … At the
same time, we cannot wait to complete business tax reform before taking action
to fix this problem."
He confirmed that President Barack Obama's legislative plan to end the incentives
that are said to encourage inversions would include a ruling that a company "would
not be able to claim foreign tax residence if it is still managed and controlled
in the US, does a significant amount of its business here, and does not do a
significant amount of its business in the country it claims as its new home."
He also welcomed the plan put forward by Democrat lawmakers, which says that "to make
sure the new company is truly a foreign-based entity, the original shareholders
of the foreign firm would now have to own at least 50 percent of the merged
company, rather than only 20 percent, which is the current legal standard,"
and that "to prevent a rush of corporate inversions to get in under the
wire before a change in the law, legislation should work retroactively, applying
to any deal after early May of this year."
Nevertheless, he also reiterated that "the Administration is clear-eyed
about the possibility that Congress may not move as quickly as necessary to
respond to the growing wave of inversions," and that, therefore, "the
Treasury Department is completing an evaluation of what [it] can do to make these
deals less economically appealing."
"We plan to make a decision in the very
near future," he announced.
Meanwhile, in support of the Administration's call for anti-inversion legislation,
Bloomberg reported that Charles Schumer (D – New York)
is preparing to set out a detailed bill that would, among other things,
contain a policy to restrict "earnings stripping," by denying interest
deductions where US companies have debt over a certain level. While Schumer's plan is said to be subject to change, and that no date has
yet been set for its announcement, its major surprise could be that the measures may have retroactive effect as far back as April 17, 1994.