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US Treasury Seeks to Stop Corporate Inversion Deals

Walgreens retail store in Boston, Massachusetts, June 4, 2014. Walgreen Co. is among many companies considering combining operations with foreign businesses to trim their tax bills.

The Obama administration says it has taken the first step to discourage U.S. companies from moving their tax residence overseas to avoid paying their fair share of taxes.

The U.S. Treasury Department has announced new regulations designed to limit the ability of companies to seek refuge in lower tax countries through so-called "corporate inversions," in which a U.S. company acquires a foreign company and becomes that firm for tax purposes.

The Treasury Department will make it harder for companies to move overseas by tightening ownership requirements.

Inversions are now allowed as long as the old U.S. firm's shareholders own less than 80 percent of the stock in the merged company, but Treasury’s announcement on Monday appears to raise that hurdle.

Treasury Secretary Jack Lew said, “This action will significantly diminish the ability of inverted companies to escape U.S. taxation.”

He added that for some companies considering inversions, the new measures would mean inverting would “no longer make economic sense.'”

Democrats generally supported the action, while Republicans faulted the administration for not making a greater effort to work with Congress to enact comprehensive corporate tax reform.

Republicans pointed out the United States has the highest corporate tax rate in the developed world. Congressman Dave Camp (R-Mich.), who chairs the tax-writing House Ways and Means Committee, said until there is tax reform, the United States is "going to keep losing good companies and jobs to countries that have or are actively reforming their tax laws.”

Many Democrats want changes to result in higher tax revenue, while Republicans prefer an overhaul that leaves overall corporate tax revenue essentially the same.

Some business analysts say Treasury's action against inversion deals may have a temporary effect, but ultimately blocking them comes down to the credit market and the availability of cheap money. They say the transnational flurry of deals has little to do with taxes, or at least that taxes are a secondary concern.

The business press has reported that without a change in the rules governing a company’s ability to move abroad through the acquisition of a foreign competitor, the U.S. Treasury might lose about $20 billion over the next decade, roughly $2 billion per year. (The U.S. Department of Defense spends nearly that per day, and Medicare fraud is estimated to run at least $60 billion per year.)

According to the Economic Policy Institute’s Joshua Smith, tax inversions are getting so much attention “because there is something about [them] that just feels wrong."

He said, "Corporations are taking advantage of something that normal people can’t, and that this is revenue that should be going to the Treasury.”

Some information for this report was provided by AP.

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