The Obama administration urged Congress Wednesday to pass legislation that would stop corporations from undergoing foreign mergers to reduce their tax bills.
Treasury Secretary Jacob Lew wrote a letter to Congress asking them to stop the practice called inversion. It involves the purchase of smaller foreign competitors by U.S. corporations to reincorporate overseas and reduce their tax obligations. Lew asked legislators to "enact legislation immediately...to shut down this abuse of our tax system."
"The firms involved in these transactions still expect to benefit from their business location in the United States, with our protection of intellectual property rights, our support of research and development our investment climate, and our infrastructure, all funded by various levels of government," the letter read. "But these firms are attempting to avoid paying taxes here, notwithstanding the benefits they gain from being located in the United States."
In the past week, two U.S.-based pharma companies, AbbVie and Mylan, have moved ahead with foreign mergers that would see them moving overseas, primarily to skip high tax bills. This adds to the 50 or so companies that reincorporated overseas through inversion in the last 10 years, most of them since 2008.
"The best way to deal with this is through comprehensive business tax reform and we have a plan out there that would accomplish multiple goals," Lew said, speaking at the CNBC Delivering Alpha conference.
Members of both houses have expressed their intent to stop the practice and President Barack Obama even included a provision he presented to Congress that would ban the practice. But all parties have been slow to move on the issue.
Lew suggested that Congress enact legislation to halt inversions and, interestingly, suggested that it be retroactive to May. Making the legislation retroactive to May would mean that the mega pharma deals mentioned above could be disrupted.
In the past few months, Minneapolis-based Medtronic agreed to a $43 billion deal with Covidien and Mylan agreed to purchase certain assets from Abbot Laboratories. AbbVie, based in Chicago, is in the process of closing a deal with Irish drug maker Shire for a $53 billion, with all three companies preparing to reincorporate in Europe. Ireland, among other EU nations, has been a preferred destination for such companies because of its low tax rate.