According to President Barack Obama, companies that use cross-border mergers to avoid U.S. taxes are in effect revoking their citizenship, CNN reports.
On Thursday, Obama is set to pressure Congress to close corporate tax loopholes, which allow for mergers to take place in familiar tax havens like the Cayman Islands. The process, called an ‘inversion,’ occurs when a U.S. company merges with another company in a foreign jurisdiction, allowing the U.S. company to take advantage of lower tax rates outside the United States.
Current law holds that U.S. shareholders must own less than 80 percent of the merged company in order to qualify for the lower tax rate in a foreign jurisdiction.
Mergers can dramatically reduce the amount of tax revenue collected by the government. Although the deal fell through in the end, the U.S. drug company Pfizer was set to merge with London-based company AstraZeneca, which would have reduced its tax rate from 35 percent to 21 percent in England.
In clarification of Obama’s remarks, a White House official reiterated that companies “are essentially renouncing their American citizenship so that they can ship their profits overseas to avoid paying taxes – even as they benefit from all the advantages of being here in America.” Last week, Secretary of the Treasury Jack Lew stated to Congress that inversions “hollow out the U.S. corporate income tax base.”
Obama’s proposed modification, then, is to slash the 80 percent ownership figure down to 50 percent, and retroactively extending the rate change back to May. Obama administration officials estimate that if changes are not made, the cost to the Treasury of the next decade will total $17 billion dollars, based on the 47 companies that have already engaged in mergers over the past decade.
Republican Sen. Orrin Hatch of Utah said he was open to looking at the issue, so long as the retroactive element is removed, and the policy proposal doesn’t increase government revenues.
“Ultimately, the best way to solve this problem will be to reform our corporate and international tax system in a manner that will make our multinationals competitive against their foreign counterparts,” Hatch said.
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