U.S. President Barack Obama on Tuesday championed the government's new steps to try to make it less attractive for American companies to cut their U.S. tax bills by buying foreign companies to technically move their headquarters overseas while retaining operations in the United States.
Obama said the practice, known as a tax inversion, is "one of the most insidious tax loopholes" and called on the Republican-controlled Congress to permanently ban it.
He said tax avoidance "is a big global problem. A lot of it is legal and that's the problem. They're gaming the system. A lot of these loopholes come at the expense of middle class families. This is all net outflow of money that could be used here in the United States" to improve roads, schools and other government programs.
Obama commented a day after the Treasury Department issued 300 pages of new regulations that include a limit on internal corporate borrowing. Companies use that to "strip" earnings from a U.S. subsidiary by having it borrow money from the parent company overseas, and then deduct the interest it repays to the parent in order to lower its U.S. tax bill.
Treasury Secretary Jacob Lew said ultimately it is up to Congress to pass new legislation to prevent companies from using corporate tax inversions. He said until then, creative accountants will find new ways to avoid paying U.S. taxes.
The tax inversion process usually involves a larger U.S. firm buying a smaller foreign one that is located in a country with lower taxes. That is the case in the $160 billion merger announced in November between the U.S.-based drug company Pfizer and Ireland's Allergan company, which said they are reviewing the new rules.