US Tries To Clamp Down On Firms Relocating Tax Addresses Abroad

Tom Burroughes

16 July 2014

The US administration is seeking to stop US firms from using cross-border mergers to avoid taxes, a trend that highlights how the US and other governments are seeking to clamp down on tax strategies to minimize tax.

There is anger at what are called “corporate inversions”, where a US-based multinational group restructures so that the US parent of the group is replaced by a foreign corporation, usually in a country levying lower taxes, such as Ireland or the UK, for example. Companies such as Medtronic and Mylan have announced they want to shift their legal addresses outside the country. In a case that led to political controversy in the UK, Pfizer, which is based in New York, tried to make a similar move to the UK by its attempted purchase of UK-listed AstraZeneca, although that attempt failed.

US corporate income tax, levied at the federal level, is taken at rates up to 40 per cent , the highest in the industrialized world. In some countries, for example, the UK, corporate tax is 21 per cent . The average level in the countries that are members of the Organization for Economic Co-operation and Development is 24.1 per cent; in neighboring Canada, the rate is 26.5 per cent. In some nations, such as Ireland, it is 12.5 per cent.

According to JP Morgan Private Bank, US corporations, faced with relatively high corporate taxes in the US, are keeping around $700 billion outside the country, preferring to buy foreign assets, rather than repatriate these monies back to the US. This has been a reason for strong M&A activity so far this year.

The relevance of this issue to wealth management lies in how the issue demonstrates that the US is often suspicious of cross-border activity where there might be a tax-reduction gambit. In the case of individuals, the US has implemented laws designed to make it harder for expat Americans to evade taxes through the FATCA Act, originally passed into law in 2010.

The US administration’s call for action is contained in a letter sent from US Treasury Secretary Jacob Lew, dated July 15, to Dave Camp, chairman of the Committee on Ways and Means in the US House of Representatives. His letter calls for "a new sense of economic patriotism".

“The President has called for undertaking business tax reform as a way to improve the investment climate in the United States and to support the creation and retention of high-quality American jobs. Short of undertaking a comprehensive reform of the business tax system, there are concrete steps that Congress can take now that would address this urgent issue,” the letter said. Among the suggestions is that firms cannot change their corporate tax domicile without a change in control of the firm itself. The letter said Congress should change the law immediately and apply it retroactively to May 2014.

The letter said that firms making these “corporate inversions” cover sectors such as pharmaceuticals, retail, consumer and manufacturing” and that they still expect to benefit from being located in the US, with protection of intellectual property rights, support of research and development, investment climate, “all funded by various levels of government”.

"The best way to address this situation is through business tax reform that lowers the corporate tax rate, broadens the tax base, closes loopholes, and simplifies the tax system," his letter said. "But even as we do that, we should prevent companies from effectively renouncing their citizenship to get out of paying taxes."

“But these firms are attempting to avoid paying taxes here, notwithstanding the benefits they gain from being located in the United States,” the letter concluded.

According to a report by Bloomberg, the Obama administration has proposed making it effectively impossible for a US-based company to purchase a smaller foreign competitor and take that other company’s address.