Corporate America is firing back at the the Obama administration’s crackdown on corporate tax inversions, arguing that the new restrictions could cause “bad economic results.”
The response came soon after Monday night’s Department of the Treasury announcement of new rules that could make it more difficult and less profitable for U.S. firms to pursue inversions — reincorporating overseas in a bid to lower future taxes and gain freer use of cash held in foreign subsidiaries. The rules, which took effect immediately, would cover pending deals such as Burger King’s merger with Canada’s Tim Horton’s doughnut chain and medical device maker Medtronic’s acquisition of Ireland’s Covidien.
Treasury Secretary Jacob Lew said the crackdown is aimed at halting a wave of planned or announced inversions that could erode the nation’s corporate tax base and shift more of the tax burden to small businesses and average American taxpayers.
Treasury to crack down on corporate tax ‘inversions’
The new rules would make it harder for companies to transfer funds from overseas divisions back to the U.S. without paying taxes on the transactions. Martin Regalia, chief economist for the U.S. Chamber of Commerce, said U.S. companies that pursue inversions would still be able to use the overseas cash — but not in ways that would directly benefit the national economy.
“In fact, the administration just assured that deferred income in the once foreign subsidiary will never come back to the U.S. to help create income, jobs and economic growth here,” said Regalia in a statement responding to the crackdown. “Bad public policy produces bad economic results.”
Corporate inversions mean tax hit for shareholders
Regalia and other critics of the Treasury rules said inversions should be dealt with as part of a comprehensive revamping of the nation’s tax policy, including a reduction of the 35% U.S. top tax rate on businesses, the highest among major world economies, plus a revision of the U.S. policy of taxing firms on overseas as well as domestic income.
Many major U.S. firms employ tax-saving strategies that keep their payment rates below the U.S. maximum. But companies contend that lower business tax rates overseas remain a powerful draw as they vie against corporate competitors.
“The continued approach of the U.S. on this issue is yet another example of antiquated tax policy which fails to create a pro-business environment,” said Frederic Donnedieu, chairman of Taxand a global organization of tax advisers to multinational businesses. “Combined with its approach towards offshore cash, the country is creating an uneven playing field and is losing out to those jurisdictions who recognize the benefits of a forward looking tax policy.”
Similarly, Business Roundtable President John Engler said the government crackdown “does nothing to attract new businesses and investment to the United States.”
But members of the Financial Accountability and Corporate Transparency Coalition, a group that advocates action to close corporate tax loopholes, characterized the new rules a strong first step.
“But now the ball is in Congress’ court — in order to stop the use of inversions to avoid taxes, our representatives should waste no time in passing legislation that will fix the problem once and for all,” said Jaime Woo, tax and budget associate for U.S. PIRG, a public interest watchdog group and coalition member.
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