U.S. Treasury Secretary Jacob Lew told the Urban Institute yesterday that "in the very near future" he will decide on steps President Obama can take to curb tax inversion deals without congressional action.
"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," Lew said, according to the Minneapolis StarTribune. "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."
He did not take any questions about what those actions might include.
"By effectively renouncing their citizenship but remaining here, these companies are eroding America's corporate tax base," he said, referring to a growing list of mostly healthcare companies that are merging for tax purposes, including devicemakers Medtronic and Covidien. Medtronic ($MDT) aims to move its tax domicile to Ireland, also the home base of Covidien ($COV), following the $43 billion megatransaction, thereby avoiding paying U.S. corporate taxes on income earned abroad upon repatriation.
"Only a change in the law can shut the door, and only tax reform can solve the problems in our tax code that lead to inversions," he said, according to the New York Times. But so far Congress hasn't taken up any of President Obama's proposals, such as a 28% corporate tax rate (instead of 35%) or raising the tax inversion-enabling bar for foreign ownership from 20% to 50%, which would endanger the inversion element of Abbott's ($ABT) sale of its emerging markets generic drugs business to Mylan ($MYL).
Prior governmental action to deter inversion has proven ineffective. Medtronic shareholders will pick up the tab of a 2004 law that imposes a 15% tax on stock and option awards to top executives of companies seeking tax inversion deals. That's because the company decided to cover the special tax's bill for the 15 executives and 10 company directors at a cost of $63 million, including $24.8 million in special taxes for CEO Omar Ishrak. Drugmaker AbbVie ($ABBV) also agreed to take a similar measure in the wake of its purchase of Ireland's Shire for $54 million.
Shareholders also heckled Ishrak at Medtronic's annual shareholder meeting because they will face hefty capital gains taxes on their Medtronic stock, which the deal "effectively dissolves," explains the StarTribune. After paying taxes on the gains made under the old stock, the shareholders will receive stock in the new Ireland-based company, Medtronic PLC.
Now, the shareholders and company executives must also deal with potential action from the Obama administration as the inversion mania shifts from corporate boardrooms to the halls of Washington, DC, institutions.
- read more on Lew's comments in the StarTribune and New York Times
- here's more on the special tax from the StarTribune
- get more on the shareholder meeting from the StarTribune