Treasury Secretary Jacob Lew said comprehensive tax reform would be the best way to prevent further corporate inversions, but called on Congress to pass legislation to stem the tide of corporations merging with other companies overseas in order to cut their taxes.

“A corporate inversion is a transaction in which a U.S.-based multinational group restructures so that the U.S. parent of the group is replaced by a foreign corporation, typically located in a low-tax country,” Lew explained in a letter Tuesday to leaders of Congress’s main tax committees, the House Ways and Means Committee and the Senate Finance Committee. “Such transactions allow firms to reduce their level of worldwide taxation, but in the aggregate, they function to hollow out the U.S. corporate income tax base.”

Lew noted that President Obama has called for undertaking business tax reform as a way to improve the investment climate in the U.S. and support job creation. However, he noted that Congress could take steps in the meantime to address the issue, which has taken on increasing urgency. More companies, particularly in the pharmaceutical industry, have been merging with overseas partners in recent months, most recently this week with news of Mylan buying Abbott Laboratories’ generic drug business and forming a new company headquartered in the Netherlands, and AbbVie moving to acquire Shire in Ireland (see Mylan to Add Abbott’s Generic-Drug Unit for Tax Advantage).

“In recent months there have been reports of a number of corporate inversion transactions designed to change the tax domicile of a U.S.-based multinational firm with minimal change in its business operations,” Lew wrote. “These transactions involve the purchase of a foreign corporation (generally in a country with a much lower corporate tax rate and generous rules for shifting income between countries), the transfer of tax domicile to the foreign firm’s country of incorporation, and the shifting of tax liability for the combined firm to the new foreign tax domicile.”

Lew noted that some of the recently announced deals include industries besides pharmaceuticals, including retail, consumer goods and manufacturing. Nevertheless, he added, the firms involved in the transactions still expect to benefit from their business location in the U.S., where their intellectual property rights are protected, their research and development efforts are supported, they enjoy a favorable investment climate, and their infrastructure is funded by various levels of government. “But these firms are attempting to avoid paying taxes here, notwithstanding the benefits they gain from being located in the United States,” he added.

Lew reiterated that the best way to address the situation is through business tax reform that lowers the corporate tax rate, broadens the tax base, closes loopholes and simplifies the tax system. “But even as we work to do that, we should prevent companies from effectively renouncing their citizenship to get out of paying taxes,” he wrote.

He noted that President Obama included a proposal in the administration’s fiscal year 2015 budget to ensure that companies could not change their corporate tax domicile without a change in control of the company itself. Lew pointed out that the proposal has attracted support from several lawmakers, including Senate Finance Committee chairman Ron Wyden, D-Ore., Senate Armed Services Committee chairman Carl Levin, D-Mich., Rep. Sander Levin, D-Mich., the ranking Democrat on the House Ways and Means Committee, and Rep. Chris Van Hollen, D-Md., the ranking member on the House Budget Committee.

Lew said they “have put companies on notice that any transaction that takes place after early May 2014 will not have the desired effect of lowering future U.S. tax liabilities.” He urged Congress to enact such legislation immediately and make it retroactive to May 2014 in order to shut down such “abuse” of the tax system.

“What we need as a nation is a new sense of economic patriotism, where we all rise or fall together,” Lew wrote. “We know that the American economy grows best when the middle class participates fully and when the economy grows from the middle out. We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes. I hope that you will support these legislative initiatives to reverse the trend toward corporate inversions.”

Wyden said he was exploring options to curb the inversion trend. “This inversion loophole must be plugged,” he said in a statement responding to Lew’s letter. “As the speed of inversions increases, this will only fuel bipartisan urgency to stop companies from deserting the U.S. I’m talking with my colleagues and exploring options for addressing this in the near and long term.”

Rep. Sander Levin, also responded favorably to Lew’s letter. “I greatly appreciate Secretary Lew’s call for immediate action to shut down this abuse of our tax system,” he said in a statement. “The Republican refusal to act now to stop this abuse explains why more and more Americans believe the playing field is rigged against them. Ordinary Americans can’t change their address to an overseas location in order to avoid paying taxes. We must act now to ensure that big corporations are unable to do just that.”

His brother, Sen. Carl Levin, who has already introduced legislation known as the Stop Corporate Inversions Act of 2014, also welcomed Lew’s letter. “Secretary Lew’s letter and today’s statement by Senator Wyden are clear evidence of the growing public support for closing the egregious tax loophole that allows companies to avoid paying taxes just by shifting their address to an offshore tax haven,” he said. “It’s clear that the wave of corporate inversions to avoid paying taxes is accelerating, and it is urgent that Congress act to close the loophole.”

Juliane Keppler, managing director of the global tax and regulatory team within NASDAQ OMX Corporate Solutions, believes there are some positive benefits in the inversion trend. “I see it as corporations fulfilling their fiduciary duty to their shareholders by finding effective ways to grow their business in a cost effective manner, including taking advantage of tax benefits when re-domiciling,” she said.

In response to Lew’s letter, Keppler argues that it would be wrong to penalize companies until there is a better solution. “I agree there is a need to make the U.S. competitive enough so that companies want to stay in the U.S.” she said. “Penalizing companies by establishing a prohibition in the interim until a plan has been worked out reflects little confidence in the plan happening soon or that it will yield the desired result.”

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