Bloomberg News

U.S. Seeks Legislation to Curb Offshore Tax Deals

July 16, 2014

Treasury Secretary Jacob J. Lew

Treasury Secretary Jacob J. Lew wrote, “We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.” Photographer: Andrew Harrer/Bloomberg

The Obama administration called for immediate congressional action to stop U.S. companies from using cross-border mergers to escape the country’s tax system, the latest trend in corporate deal-making.

In a letter calling for a “new sense of economic patriotism,” Treasury Secretary Jacob J. Lew said Congress should pass tax changes retroactive to May.

Senate Majority Leader Harry Reid said today that he wants to advance legislation proposed by Senator Carl Levin of Michigan and that it’s taken too long already. White House Press Secretary Josh Earnest said President Barack Obama will discuss the issue more in the weeks ahead.

“We should prevent companies from effectively renouncing their citizenship to get out of paying taxes,” Lew wrote in the letter to top congressional tax writers, which was dated yesterday. “We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes.”

Moving Profits to Cut U.S. Taxes

The mergers used to legally avoid taxes, known as inversion transactions, have become increasingly popular over the past year, particularly in the pharmaceutical industry. Companies including Minneapolis-based Medtronic Inc. (MDT:US) and Canonsburg, Pennsylvania-based Mylan Inc. (MYL:US) have announced plans to move their legal addresses outside the U.S.

Pfizer Inc., based in New York, attempted to move its tax address to the U.K. by purchasing London-based AstraZeneca Plc. (AZN)

DeLauro Amendment

Representative Rosa DeLauro, a Connecticut Democrat, persuaded the House to adopt an amendment last week barring companies that moved their legal address to Bermuda or the Cayman Islands from getting some federal contracts.

The amendment would apply to only a few companies, and DeLauro said today she’ll expand her proposal to affect all companies that move their address overseas to avoid taxes.

“It is all about tax dodging and being a tax cheat,” she said.

Still, Lew’s letter and the Democrats’ actions may not be enough to prompt Congress to move quickly.

Three Senate Finance Committee Republicans -- Orrin Hatch of Utah, Mike Crapo of Idaho and Rob Portman of Ohio -- said in interviews today they had no interest in moving stand-alone legislation to stop inversions.

‘Very Disappointed’

“I would be very disappointed if the administration believes the answer to dealing with companies going offshore is to make it harder to be an American company,” Portman said, adding that the proposal would encourage companies in other countries to buy U.S. businesses and push jobs overseas. “We need tax reform.”

Congressional Democrats, including Senator Levin and Representative Sander Levin, both of Michigan, have introduced bills that echo the administration’s approach of making it effectively impossible for a U.S.-based company to purchase a smaller foreign one and take a foreign address.

Senator Levin’s bill, S. 2360, would impose a two-year moratorium on inversions, retroactive to May 8.

Those measures haven’t advanced because of Republicans’ insistence that any changes be made as part of a broader revamp of the tax code that isn’t likely to happen until 2015 at the earliest.

Lew’s letter doesn’t change the fundamental political dynamics at play or increase the likelihood of significant policy changes, Henrietta Treyz of Height Analytics LLC wrote today in a note to clients.

Election Year

“Absent a major catalyst from the business community, such as additional announcements by major, longstanding American companies that they are also considering inversion, we do not see the two parties coming together this election year to enact a significant change to the tax code,” she wrote.

In inversions, U.S.-based businesses purchase a foreign company, then switch the legal address to take advantage of the foreign jurisdiction’s favorable tax rules. In many cases, the companies’ executives remain in the U.S.

More recent deals, including Medtronic’s merger with Dublin-based Covidien Plc (COV:US), include clauses that allow the companies to walk away if Congress changes the tax law.

The administration and lawmakers in both parties favor tax-code changes that would lower the 35 percent corporate rate and tighten international tax rules. They’ve been unable to agree on the details or on changes to individual taxation.

‘Bipartisan Urgency’

Senate Finance Chairman Ron Wyden has altered his position and expressed openness to near-term action.

“This inversion loophole must be plugged,” he said in a statement today. “As the speed of inversions increases, this will only fuel bipartisan urgency to stop companies from deserting the U.S.” He said he was considering ways to address the matter “in the near and long term.”

Earlier, Wyden had supported a retroactive bill on corporate inversions, though he wanted to wait to enact it until broader tax law changes were made.

Reid said inaction on the issue “has been under the umbrella of: ‘We can’t do anything until we do tax reform.’” Instead, he said, “We feel that if we don’t do something on inversions, there will be nothing to build tax reform on.”

Shares of some health-care companies that plan to carry out inversions, or be sold to an inverting company, dropped today after Lew’s statements even as the Standard & Poor’s 500 Pharmaceuticals Index rose. Horizon Pharma Inc. (HZNP:US), a Deerfield, Illinois-based drugmaker with plans to become Irish, dropped 90 cents, or 6.1 percent, to $13.87 in Nasdaq Stock Market trading.

QLT, Auxilium

QLT Inc. (QLTI:US) dropped 18 cents, or 3 percent, to $5.97. The Vancouver-based drugmaker agreed last month to be sold in an inversion transaction to Auxilium Pharmaceuticals Inc. (AUXL:US) of Malvern, Pennsylvania.

Shire Plc (SHP), the drugmaker with management offices in Basingstoke, England, and an Irish tax domicile, dropped 79 pence, or 1.6 percent, to 47.86 pounds. Earlier this week, Chicago-based AbbVie Inc., which is seeking to take Shire’s address, made a cash-and-stock takeover offer worth about 53.20 pounds at the time.

Medtronic, the medical device maker, dropped 63 cents, or 1 percent, to $62.93, while Covidien, the company whose Irish address Medtronic plans to acquire, dropped $1.57, or 1.7 percent, to $88.93.

The House has adopted anti-inversions amendments on four spending bills. The Senate included similar language in a defense spending bill yesterday. None of the measures has become law.

‘Whole Hog’

In expanding her proposal to bar federal contracts for companies moving their address to any overseas location, DeLauro said, “My view is to go whole hog. You’ve got Ireland, you’ve got the U.K., you’ve got the Netherlands.”

“We should shut down the opportunity for people to do this,” she said in an interview. “It is un-American.”

A Bloomberg News investigation found that existing and past limits have had little or no effect on companies’ ability to win contracts.

Wyden’s panel plans a July 22 hearing on international taxation, including inversions.

The Obama administration has proposed making it effectively impossible for a U.S.-based company to purchase a smaller foreign competitor and take that other company’s address. The proposal would raise $17 billion over the next decade, according to the administration.

20 Percent

The current law, written to address a round of inversions in 2001 and 2002, lets U.S.-based companies carry out such transactions if the foreign partner owns at least 20 percent of the stock of the combined company.

U.S. companies are treated as domestic unless they undergo a merger in which shareholders of the foreign company end up with at least 20 percent of the combined company’s stock. The administration plan would raise that threshold to 50 percent.

Lew, speaking today at a conference in New York, said the U.S. government doesn’t have the authority to address inversions with regulations and needs congressional action.

Lew’s letter was first reported by the Wall Street Journal.

The Levin bills are S. 2360 and H.R. 4679.

To contact the reporter on this story: Richard Rubin in Washington at rrubin12@bloomberg.net

To contact the editors responsible for this story: Jodi Schneider at jschneider50@bloomberg.net Laurie Asseo


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Companies Mentioned

  • MDT
    (Medtronic Inc)
    • $61.74 USD
    • -0.84
    • -1.36%
  • MYL
    (Mylan Inc/PA)
    • $49.37 USD
    • -1.18
    • -2.39%
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