The U.S. Internal Revenue Service probably can’t take regulatory action to stop companies from lowering tax bills through deals that put their legal addresses outside the country, IRS Commissioner John Koskinen said.
Pfizer Inc. (PFE:US) this week proposed the biggest such deal yet, a $98.7 billion takeover of AstraZeneca Plc (AZN) that would move the largest U.S. drugmaker to the U.K. for tax purposes and allow it to pay a lower tax rate.
“We’ve done, I think, probably all we can within the statute,” Koskinen, 74, told reporters in Washington yesterday, saying the trend of corporate moves underscores the need for Congress to change the U.S. tax code. “We try to make sure people are within the bounds, but if they’re within the bounds, if they play according to the rules, then they have a right to do that.”
Koskinen’s remarks show the limits of the U.S. government’s ability to respond while Congress is deadlocked on tax policy. The commissioner’s statement suggests that the Obama administration won’t or can’t make a regulatory move to stop the so-called corporate inversions it opposes.
Pfizer would join at least 19 other companies making or contemplating similar transactions, including Chiquita Brands International (CQB:US) Inc. and Omnicom Group (OMC:US) Inc., the largest U.S. advertising firm.
Cracking down on deals in which U.S. companies move their legal address outside the country to pay lower taxes is a priority for the Obama administration, a Treasury Department official said yesterday.
The official, who requested anonymity to discuss the administration’s plans, said the transactions emphasize the need for a revision of the U.S. tax code that includes reducing rates. Earlier this year, the administration proposed making the deals, known as inversions, harder to accomplish.
The broader tax-code revision and the narrower limits on inversion deals haven’t advanced in Congress.
U.S.-based companies with available cash will continue looking for opportunities to acquire foreign companies as a platform for inversions, said Bret Wells, an assistant professor at the University of Houston’s law school.
That will continue, he said, until Congress writes tighter rules that prevent foreign-based companies from loading up their U.S. subsidiaries with deductions for debt and other expenses and then shifting profits into low-tax jurisdictions.
“What inverted companies are telling us is that foreign-based multinationals have a significant advantage,” Wells said. “The capital markets respect earnings per share. That’s what they respect. In gauging an inversion as pennies of benefit to earnings per share, the market’s just going to applaud that.”
U.S. lawmakers have responded to the string of deals by talking about the importance of broader changes to the U.S. tax code, which are months if not years away.
“The last few weeks have presented a textbook for why tax reform is so important,” Senator Ron Wyden, an Oregon Democrat and chairman of the tax-writing Finance Committee, told reporters this week. “The fact that the headlines are being dominated by how you can game the American tax code with these overseas deals ought to be the wake-up to anybody.”
The prospect of Treasury regulations or legislation could encourage companies to accelerate deals.
Such deals have become attractive in part because of the increasing disparity in countries’ marginal corporate income tax rates, which are typically higher than what companies actually pay.
Ireland, which will be the new home address for Charlotte, North Carolina-based Chiquita, the banana distributor, has a 12.5 percent rate. The U.K.’s rate is 21 percent and will decline to 20 percent next year, with no tax on active businesses outside the country.
In contrast, the top U.S. corporate rate is 35 percent. Companies also must pay U.S. taxes when they repatriate foreign profits, after receiving credits for foreign taxes.
The spate of inversion deals mirrors what happened in 2001 and 2002, when companies including Ingersoll-Rand Plc (IR:US) and Cooper Industries Plc moved abroad.
Then, Congress effectively imposed a moratorium as the top members of the Senate Finance Committee announced plans to advance legislation and said any bill would be retroactive to that date.
Two years later, the ensuing law prevented companies from receiving the tax benefit of an overseas merger if their existing shareholders still owned 80 percent or more of the company’s stock after the deal.
In his budget plan released this year, President Barack Obama proposed lowering the 80 percent threshold to 50 percent. That plan would raise $17 billion for the U.S. Treasury over the next decade.
Some members of Congress, including Democratic Senator Jeanne Shaheen of New Hampshire, have introduced bills that would tax inverted companies as domestic if they are managed and controlled in the U.S.
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