He said the practice also hurts middle-class Americans because “that lost revenue has to be made up somewhere”.
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He commented a day after the Treasury Department announced its newest steps to discourage inversions, which take place when us companies relocate their business interests on paper to take advantage of lower overseas tax rates. Its latest move focuses on a practice known as earnings stripping, where a company uses internal loans to move money from the USA to its overseas operations.
While the wealthy have stashed their millions in untaxed offshore accounts, corporations have filed “change of address” documents for their corporate offices and completely avoided paying any taxes on their billions in profits.
The basic principle is the same, the president said. “We’re just hemorrhaging the resources that we need from companies to pay their fair share, [and] if we sit by and do nothing, we will see a continued hollowing-out of the middle class”. Their use has sparked a political outcry.
Allergan is the amalgam of four merged firms created via inversions over the past three years: the 2013 purchase of Irish drug maker Warner Chilcott (formerly Galen) by New Jersey-based Actavis, the 2014 acquisition of U.S. firm Forest Laboratories by Dublin-based Actavis and the $66 billion takeover of California-based Allergen in 2015 by Actavis.
The government’s new rules would apply to all deals that close after Monday and all intercompany debt transactions issued after Monday. American pharmaceutical giant Pfizer will not be able to complete its planned merger and inversion with Allergan. Pfizer shares rose 66 cents, or 2.2 percent to close at $31.38.
Just about everyone agrees that the corporate tax code must be reformed, but the polarized Congress so far has just talked about it. “We appreciate that the issues raised are important for the future competitors of the country and that many good minds are looking to reform the system, but the two parties are moving forward with the transaction”, Read said in November.
“Only Congress can make sure that all the other loopholes that are being taken advantage of are closed”, Obama said, urging lawmakers to act. But prospects for passing such legislation in an election year appear low given wide differences between Democrats and Republicans on taxes.
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In a statement, Sen. Charles Schumer (D., N.Y.). “I will say it gets tougher sometimes when the IRS is starved for resources and squeezed by the congressional appropriation process so that there are not enough people to actually pay attention to what all the lawyers and accountants are doing all the time”, said Obama. The rules would also recalculate the anti-inversion penalties that USA companies incur for mergers with foreign companies, where American shareholders would own at least 60% of the combined company. Politicians in Washington have let America fall from the best corporate tax rate in the industrialized world in the 1980’s (thanks to Ronald Reagan) to the worst rate in the industrialized world.
