The US Congress must pass legislation to prevent American companies relocating their legal headquarters overseas and stop rewarding countries that practise "race-to-the-bottom tax competition," a senior US official has said.
US treasury official Robert Stack urged the powerful Senate finance committee to pass a law that curtails "inversions" where a US company acquires a foreign rival allowing them to shift their head office to a low corporate-tax country, including Ireland, to avoid the higher American tax rate of 35 per cent.
The rising number of corporate inversions has led the Obama administration and some Democrats to call for urgent legislation to limit transactions to prevent the future loss of tens of billions of dollars in US taxes, though some Republicans are resisting the change fearing that it will disadvantage American companies against foreign competitors.
They want new legislation to be passed as part of a broader reform of the US tax system, a more divisive issue between the two parties.
The transactions under scrutiny include the acquisition by Minnesota medical device firm Medtronic of Irish company Covidien in a $42.9 billion (€31.3 billion) deal agreed last month that will lead to the US firm shifting its legal address to Ireland for tax purposes to reduce its tax bill by moving to the lower Irish rate of 12.5 per cent.
US companies have used foreign acquisitions to relocate headquarters to the UK, the Netherlands and Switzerland.
"I want to emphasis the serious need for the United States to directly address the potential loss of federal tax revenues from corporate inversion transactions and the need to enact legislative proposal or a similar one aimed at curbing them," said Mr Stack, a deputy assistant secretary for international tax affairs at the US Department of the Treasury.
“Once companies invert, there is a permanent loss to the US income tax base since it is safe to assume that these are not coming back to the United States.”
Mr Stack said inversions were “on the increase” and the US administration was aware of many more “in the works.” He described the practice as US companies “effectively renouncing their citizenship to get out of paying taxes.” The Obama administration wants legislation applied retrospectively to May 2014 to prevent a rush of inversions.
“Letting our corporate tax base erode through inversions will worsen our fiscal challenges over the coming years and will reward countries that practise race-to-the-bottom tax competition in an effort to lure away our large US multinationals,” he said without identifying any countries.
Senator Ron Wyden, a Democrat from Oregon, described inversions as the latest outbreak of a contagion of "chronic diseases of loopholes and inefficiency" that has infected the US tax code.
Referring to the recent Medtronic-Covidien deal and the purchase of US drugmaker Questcor Pharmaceuticals by Dublin-based rival Mallinckrodt among other transactions, Senator Wyden said that the "inversion virus now seems to be multiplying every few days."
He called on Democrats and Republicans to work together to “immediately cool down the inversion fever.”
“The inversion loophole needs to be plugged now,” he said. “Second, let’s use the space created by these immediate steps to apply the indisputable, ultimate cure: comprehensive tax reform.”
Mr Wyden said that tax reform is moving slowing while inversions were moving quickly. This was a “prescription for chaos,” he said.
Senator Orrin Hatch, a Republican from Utah and the committee's "ranking member," or second-in-command, said that recent legislative proposals to curtail inversions were "punitive and retroactive."
The proposals would leave US multinationals becoming more vulnerable as acquisition targets for foreign corporations, he said.
“Rather than incentivising American companies to remain in the US, these bills would build walls around US corporations in order to keep them from inverting,” he said at the Capitol Hill hearing.
“It is going to result in results that nobody wants. This approach, in my view, completely misses the mark.”
The committee heard from a number of tax experts who pointed to the need for a reform of the tax system to compete internationally.
American multinationals were being encouraged to move their headquarters overseas to reduce their taxes because the US system taxes income at a worldwide level and the US top corporate tax rate is the highest among the developed countries, the committee was told.
Forty-seven US companies have reincorporated overseas in inversions over the last decade, most since 2008, according to the Congressional Research Service, the policy research unit in Congress. That compares with just 29 inversions in the previous 20 years.