Treasury moves to clamp down on corporate tax avoidance

The Treasury Department on Thursday issued guidance aimed at deterring U.S. companies from reincorporating overseas to lower their taxes.

In a call with reporters, Treasury Secretary Jack Lew said that the notice is an important step but “not the end of our work” on the practice, called corporate inversion. The Treasury is still looking into seeing if it can do more to make inversions less attractive.

{mosads}Lew also noted that this guidance cannot completely halt inversions, pointing out that “only legislation can decisively stop them.”

The Obama administration and many members of Congress have been concerned about inversions, a type of transaction in which a U.S. company merges with a foreign company and then incorporates the merged company in a foreign country to reduce its taxes. The Treasury had issued some guidance on inversions last year that slowed their pace, Lew said.

The new guidance makes it harder for American companies to invert in several ways, according to a Treasury fact sheet. For inversions completed on or after today, the guidance would limit the ability for a U.S. company to merge with foreign entity and have the combined company based in a third country, limit the ability for a U.S. company to inflate the size of a foreign company in an effort avoid nullifying the inversion for tax purposes, and require the new foreign parent company to be a tax resident of the country where it is created or organized to satisfy the business activities exception.

For transactions completed on or after Sept. 22, 2014, the guidance would also reduce the ability for an inverted company to transfer its foreign operations to the new foreign parent company unless it pays its current U.S. taxes, the Treasury said.

Senate Finance Committee Ranking Member Ron Wyden (D-Ore.) welcomed Treasury’s guidance and said that Congress needs to pass bipartisan tax reform in order to “end the inversion virus that is plaguing our country.”“

Inversions are a red flag on the urgent need for tax reform,” he said in a statement. “If we want to protect the economic strength of the U.S. and create jobs, this must be a top priority for all lawmakers in the year ahead.”

House Ways and Means Committee ranking member Sander Levin (D-Mich.), agreed that congressional action on inversions is needed.

“The rumors that Pfizer may announce its plans to invert as soon as next week, making it potentially the largest inversion ever, highlights the urgent need for Congress to act, in addition to steps taken by Treasury,” he said.

Senate Finance Committee Chairman Orrin Hatch (R-Utah), however, said that the Obama administration’s approach to inversions has to be scrutinized.