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Lew Calls For Immediate US Anti-Inversion Legislation

by Mike Godfrey, Tax-News.com, Washington
Wednesday, September 10, 2014

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 corporate inversions.

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.



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