U.S. Treasury Secretary Jack Lew on Monday called for swift action to close a federal tax code "loophole" that allows businesses to reincorporate abroad to avoid U.S. corporate taxes, but offered no new ideas for how to do that.
Amid growing concern among Washington policy-makers about these transactions known as inversions, Lew said the Treasury Department "is completing an evaluation of what we can do to make these deals less economically appealing, and we plan to make a decision in the very near future."
Though still rare and difficult to do, inversions have become more frequent among U.S. multinationals in recent years, with notable companies such as medical technology group Medtronic Inc. pursuing them.
The U.S. government has grappled for more than 30 years with inversions. Fifty-two substantial deals like this have occurred since 1983, about half of them since the 2008-2009 credit crisis, according to a Reuters analysis.
Laying out his views on Monday in a speech at a Washington think tank, Lew reiterated proposals already made by Democratic President Barack Obama that would make the deals more difficult to do. He also emphasized that the best way to address them is through broad business tax reform.
"Any action we take will have a strong legal and policy basis, but will not be a substitute for meaningful legislation ... 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," he said.
The likelihood of a comprehensive overhaul of the tax code this year is very remote, with congressional elections coming in November and lawmakers deeply divided over fiscal issues, according to policy analysts.
Lew acknowledged this, but referring to inversions, said "there is one loophole that should be shut down immediately."
He said, "Right now, our tax system rewards U.S. corporations when they buy foreign companies and then declare that they are based overseas ... By effectively renouncing their citizenship but remaining here, these companies are eroding America's corporate tax base."
Obama has been asking Congress for the past four years to act on fresh proposals from the White House to curb inversion deals. The president has proposed making inversions harder to do by lowering the level of continued U.S. ownership permitted for a company to be treated as a foreign corporation.
He has also urged a "substantial business activities" test that would deny foreign company status where operations are still primarily located in the United States and U.S.-managed.
In past proposals, he has also called for extending inversion limits to partnerships, as well as fighting U.S. earnings stripping by tightening the limits on deductibility of interest paid by inverted U.S. companies on inter-company debt, a practice often associated with inverted companies.
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