Treasury Decision: 'Inversion' Tax Cheats May Finally Get Their Due

via Floating Path

The Treasury Department has announced that it will decide “in the very near future” if it has the power to revoke tax incentives from companies that move their operations overseas for tax avoidance reasons. The announcement came at a business tax reform seminar at the Urban Institute.

Treasury Secretary Jacob Lew did not name specific companies but referred in general to the hot-button practice of “inversions.” Lew said no change would be a fix-all and that more legislation is needed because though the practice “may be legal, it is wrong.”  From his speech:

“The Treasury Department is completing an evaluation of what we can do to make these deals less economically appealing, and we plan to make a decision in the very near future.  Any action we take will have a strong legal and policy basis, but will not be a substitute for meaningful legislation — it can only address part of the economics.”

Lew said that the decision could be retroactive, which would put in jeopardy a deal between Minnesota-based medical company Medtronic and Ireland’s Covidien. As we wrote in August, Medtronic hired former Senators Trent Lott and John Breaux as lobbyists in an attempt to thwart legislation that would undermine their merger. Minnesota Senators Al Franken and Amy Klochubar are currently sponsoring the Stop Corporate Inversion Act of 2014 which would add the necessary legislation to curtail said practices. In moving its legal operations to Ireland and keeping its American headquarters, Medtronic avoids paying between $3.4 and $4.2 billion in taxes on foreign profits.

Lew railed against companies that use inversion to avoid paying U.S. taxes:

“By effectively renouncing their citizenship but remaining here, these companies are eroding America’s corporate tax base,” Lew explained. “That means all other taxpayers — including small businesses and hardworking Americans — will have to shoulder more of the responsibility of maintaining core public functions that everyone, particularly U.S. businesses, depends on. We are talking about our national defense, education, medical research, courts and vital infrastructure such as roads, bridges and airports. And if we allow the incentives to pursue these deals to remain in place, we run the risk of undoing the progress we have made to reduce our federal budget deficit.”

Medtronic officials claim that they “do not feel” the deal avoids taxes. But others disagree. Len Burman, Director of the Urban-Brookings Tax Policy Center, called Medtronic’s plan “tax avoidance 101.” The Minneapolis Star-Tribune provides detail of how the Medtronic deal would work.  

Medtronic officials recently told the Star Tribune that the company will use a series of loans to gain access to $14 billion in foreign cash currently held outside the reach of U.S. tax collectors. That money will be funneled to a new Ireland-based holding company, which will use the funds to help buy Covidien. The maneuver allows Medtronic to spend the money without paying $3.5 billion to $4.2 billion in U.S. taxes it would owe if it used the cash for the Covidien purchase directly. While avoiding those current taxes, Medtronic also gets to use the cash to create a new company that will avoid billions more in future U.S. taxes. 

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