U.S. Seeks Legislation to Curb Offshore Tax Deals

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.”

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.