Jack Lew pushes Congress to crack down on tax ‘inversions’

James Politi

Jack Lew, US Treasury secretary, has urged Congress to crack down on merger deals in which companies seek to redomicile overseas to reduce their US taxes, invoking the need for "economic patriotism" in reversing a practice that has flourished in recent months.

Read More US could lose $20B from corporate tax inversions

In a letter to Dave Camp, the Republican chairman of the tax-writing House Ways and Means Committee, Mr 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.

Jack Lew, U.S. Treasury Secretary.
Andrew Harrer | Bloomberg | Getty Images

Mr Lew said the tax change should take effect retroactively from May 2014 – the time when Pfizer, the US drugs company, was considering a relocation to the UK in conjunction with its $106bn bid for AstraZeneca, a British rival, that ultimately collapsed.

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"Congress should enact legislation immediately . . . to shut down this abuse of our tax system," Mr Lew wrote in the letter to Mr Camp, which was obtained by the Financial Times on Tuesday. "What we need as a nation is a new sense of economic patriotism, where we all rise and fall together," Mr Lew wrote.

The Obama administration proposal, which was backed by powerful liberal Democrats such as Carl and Sandy Levin, as well as Ron Wyden, chairman of the Senate finance committee, would clamp down on tax inversions by raising the threshold of foreign share ownership required for such a deal to be structured from 20 per cent to 50 per cent.

Read MoreUS drug firms seek inversion deals to evade taxes

By having it take effect starting in May 2014, the US Treasury and congressional Democrats hope to avoid a further increase in companies structuring such agreements over the next few months. However, retroactive application of tax changes is relatively unusual, and its use to reduce the number of inversion transactions has received criticism from business groups, conservative tax economists, and Republican lawmakers.

Mr Lew's letter on Tuesday was first reported by the Wall Street Journal. It follows plans revealed this week by Mylan, the US generic drugmaker, to move to the Netherlands through its purchase of Abbott Laboratories's European generics drugs unit.

The decision by Heather Bresch, Mylan's chief executive and the daughter of Joe Manchin, the Democratic senator from West Virginia, came just before it emerged that Walgreen, the US drugstore chain, is also considering an inversion to Switzerland as it weighs the purchase of the rest of Alliance Boots.

How tax inversions shrink corporate taxes
How tax inversions shrink corporate taxes

The most high-profile tax inversion planned by a US company, which ultimately failed, was Pfizer's effort to buy AstraZeneca this year, which increased scrutiny of such transactions in Congress and stoked debate among many US corporate tax executives, economists and lobbyists.

Driving US companies away from US shores is the corporate tax rate of 35 per cent, one of the highest in the developed world, and the treatment of foreign earnings, which are subject to US taxes when they are repatriated to America.

Read MoreSenator eyes bill to halt corporate tax inversions

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, leaving the door wide open for inversions to keep occurring.

With little legislative action expected before the November midterm elections, any hopes for tax reform have been pushed until next year at the earliest. Congressional Democrats had proposed to clamp down on inversions with a two-year moratorium to allow more time for a tax reform deal to be negotiated, but Republicans have been sceptical and it is unlikely that even Mr Lew's intervention will change that dynamic.

By James Politi, Financial Times