Risk & Economy » Tax » US Treasury secretary in move to stop tax ‘inversion’

A CRACKDOWN is needed to stop US companies from seeking mergers and acquisitions in a bid to redomicile their tax base overseas and thereby cut tax costs, the US Treasury secretary Jack Lew has told congress.

Lew is seeking to invoke the need for “economic patriotism” in reversing a practice that has become increasingly appealing in recent months.

Yesterday, it emerged FTSE 100 pharma company Shire finally bowed to the overtures of pharmaceutical AbbVie at the fifth time of asking as Shire’s board said it will support a £31bn deal that brings with it a UK tax base for the US suitor.

It comes less than two months after the collapse of Pfizer’s attempted takeover of AstraZeneca, also motivated in part by tax.

The UK headline corporation tax rate currently stands at 21%, and is set to drop to 20% from next near, well below the US’s 35% headline rate.

In a letter to Dave Camp, the Republican chairman of the tax-writing House Ways and Means Committee, Lew said US lawmakers should pass measures to stamp out “inversions”, which were contained in the Obama administration’s most recent budget proposal and later embraced by senior Democrats on Capitol Hill.

“Congress should enact legislation immediately… to shut down this abuse of our tax system,” Mr Lew wrote in the letter to Camp, the Financial Times reports. “What we need as a nation is a new sense of economic patriotism, where we all rise and fall together,” Lew wrote.

The proposal put forward by the Obama administration would deter tax inversions by raising the threshold of foreign share ownership required for such a deal to be structured from 20% to 50%.

By having it take effect starting in May 2014, the US Treasury and congressional Democrats hope nip such agreements over the next few months in the bud. However, retrospective application of tax to reduce the number of inversion transactions has received criticism from business groups, conservative tax economists, and Republican lawmakers.

Both the Obama administration and congressional Republicans have plans to overhaul the US corporate tax system entirely to make it more globally competitive, but they have been unable to agree on many of the details, allowing inversions and holding capital offshore to continue.

With little legislative action expected before the November midterm elections, any hopes for tax reform have been pushed back until next year at the earliest.