Lawmakers should eventually pass a retroactive ban on corporate inversions, assuming that Congress will not move quickly enough to address the growing number of inversions, Treasury Secretary Jack Lew said on September 8. In remarks at the Tax Policy Center hosted by the Urban Institute in Washington, D.C., Lew noted that the Treasury Department is completing an evaluation of what it can do to make inversion less economically appealing, and it expects to make a decision in the very near future.
“We cannot wait to complete business tax reform before taking action to fix this problem,” stated Lew. He reiterated President Obama’s plan to end the incentives that encourage inversions; disallowing a company from claiming foreign tax residence if it is still managed and controlled in the U.S., 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. On top of 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.
While any action taken by the Treasury Department will have a “strong legal and policy basis,” Lew said, such action would not be a substitute for meaningful legislation. He stated that “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.”
Lew said the Obama Administration wants to eliminate wasteful and inefficient carve-outs and tax expenditures, broaden the base and establish a top rate of 28 percent. “It is clear that our business tax code has become more and more distorted. The United States is an attractive place to do business in spite of our tax code, and that is something we know how to fix,” he added.
The guiding principle of the administration’s framework for business tax reform is to create an environment where businesses decisions are made for business reasons—not for tax purposes, Lew stressed. “The administration is committed to completing pro-growth business tax reform, and there is strong support across the business community for getting this done,” he said. “Still, 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.”
According to Lew, the problem with many inversions is that 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,” he said. “By effectively renouncing their citizenship but remaining here, these companies are eroding America’s corporate tax base.”
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 2014, said Lew.
By Jeff Carlson, CCH News Staff
Treasury Department News Release, TDNR JL-2622