WASHINGTON — Treasury Secretary Jacob J. Lew announced rules on Monday that are aimed at making it more difficult for American companies to lower their tax bills by relocating overseas and that would wipe out the benefits for those that do. It is the administration’s latest move to sidestep a paralyzed Congress and tackle a politically charged element of President Barack Obama’s agenda.
“While there’s no substitute for congressional action, my administration will act wherever we can to protect the progress the American people have worked so hard to bring about,” Obama said after the regulations on the so-called corporate inversions were announced.
The changes may affect pending inversion deals, like one involving AbbVie, an Illinois-based pharmaceutical company that is in the process of acquiring its smaller British rival, Shire, or the Minneapolis medical device maker Medtronic, which is acquiring Covidien in Ireland.
It is calculated to make companies considering such deals “think twice” before doing so, Lew said. Burger King announced last month it would acquire the Canadian coffee-and-doughnut chain Tim Hortons, focusing new attention on the pace of inversions. “For some companies considering deals, today’s actions will mean that inversions no longer make economic sense,” Lew said. “These transactions may be legal, but they’re wrong.”
Still, some Democrats, including those who have been the harshest critics of corporate inversions, said the actions were far too limited to substantially reduce the practice. Sen. Charles E. Schumer of New York said the Obama administration had been hemmed in by the limits to its legal authority, yielding a set of rules that most likely will hold up in court but have little substantive effect.
“Certainly they made a good effort, but what this administrative action shows is that the only real way to stop inversions is legislative,” Schumer said in an interview. In particular, he said Congress must pass legislation that stops a practice known as “earnings stripping.” That is when a parent company loads up a U.S. subsidiary with debt, which can be deducted for tax purposes, rather than treating it as equity, which is not eligible for deductions.
While Lew said his preference was for Congress to act on a broad business tax overhaul that would include anti-inversion provisions, it had become clear that would not happen before the November postelection session. In the meantime, he said Treasury was exploring additional administrative steps to attack inversions, something the president said he supported.