Risk Management

U.S. Treasury Secretary Calls for Ban on Tax Inversions

Lew wants to "shut down" corporate tax inversions retroactively to May 2014.
David KatzJuly 16, 2014

Calling on Congress to “prevent companies from effectively renouncing their citizenship to get out of paying taxes,” U.S. Treasury Secretary Jacob J. Lew said Tuesday that it should immediately enact legislation to “shut down” corporate tax inversions retroactively to May 2014.

U.S. Treasury Secretary Jacob J. Lew

U.S. Treasury Secretary Jacob J. Lew

In a letter to House Ways and Means Committee Chairman Dave Camp obtained by CFO, Lew wrote that while inversions enable companies to cut their global tax levels, “they function to hollow out the U.S. corporate income tax base.”

Lew’s statement seems to have already had the effect of spooking investors in Shire plc. Last week, U.S.-based pharmaceutical maker AbbVie said that it was moving ahead with an attempted inversion involving Shire, which is registered in Jersey, an island that’s part of the United Kingdom. Shire’s share price fell this morning because of concerns about a ban on the transactions triggered by Lew’s letter, according to a Bloomberg story.

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In inversions, U.S.-based multinationals typically replace their U.S. parent companies with foreign corporations in low-tax countries. Forty-seven U.S. corporations have reincorporated overseas via inversions in the last 10 years, according to new data compiled by the Congressional Research Service. Overall, 75 U.S. companies have inverted since 1994, with one other inversion occurring in 1983.

In an interview with CFO last year, Richard Fearon, the CFO of Eaton Corp., said that the company’s move to Dublin, Ireland as part of an inversion involving Cooper Industries produced $160 million a year in tax and cash management savings for Eaton. Fearon also said that Eaton was bent on acquiring Cooper and that the only way to do that in a way that made legal and financial sense was to relocate to Dublin.

“[T]he U.S. tax system is so disadvantageous to multinationals that to bring Cooper back into the United States would mean an immediate sizable increase in their tax bill. And there was no way that we would then be able to make the economics of the transaction work,” Fearon said last September. “After a lot of discussion, we agreed to the concept of a new Irish holding company that would effectively end up buying what was Eaton Corp.”

In his letter, Lew conceded that the best way to deter inversions “is through business tax reform that lowers the corporate tax rate, broadens the tax base, closes loopholes and simplifies the tax system.” While it works to get that done, however, Congress should work to shut down inversions that represent an “abuse of our tax system,” he wrote.

The Treasury Secretary noted that President Obama’s proposal in his 2015 budget plan to make sure that companies couldn’t change their tax domiciles without changing the control of the companies themselves was an attempt to prevent corporate tax inversions.

In April, the IRS stated that inversion transactions in which the previous U.S. shareholders of the acquired U.S. company end up owning more that 50% of the foreign acquirer will likely be taxable to those shareholders, according to a memo by Sullivan and Cromwell.