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Industryweek 10724 Obama Talking

Obama Calls Corporate Inversions 'Insidious,' Praising New Rules

April 5, 2016
New Treasury rules would limit companies’ ability to participate in inversions if they’ve already done them within the past 36 months, and could avert a merger between Pfizer and Allergan.

President Barack Obama issued a forceful denunciation of companies that shield profit overseas through corporate inversions, praising new rules that would curb what he called one of the U.S. tax system’s most insidious loopholes.

“This is something that I’ve been pushing for a long time,” Obama said at the White House Tuesday, a day after the Treasury Department announced the new measures. “When companies exploit loopholes like this, it makes it hard to invest in the kinds of things that are going to keep America’s economy going strong.”

The rules, which would limit companies’ ability to participate in inversions if they’ve already done them within the past 36 months, could thwart a planned $160 billion merger between Pfizer Inc. and Allergan Plc. Allergan has been involved in repeated inversions, under which a U.S. company adopts a foreign tax address, a move that can reduce its American tax bill.

During his remarks Tuesday, Obama called inversions “one of the most insidious loopholes out there,” and emphasized the importance of restoring faith in the U.S. tax system. Republicans in Congress have called for addressing inversions in the context of comprehensive corporate tax reform. Obama, who has said inversions result from an “unpatriotic tax loophole,” faulted lawmakers for not having acted yet.

‘Favors the Wealthy’

“When politicians perpetuate a system that favors the wealthy,” he said, “it’s not surprising that people feel they can’t get ahead. It’s not surprising that that may produce politics” where people feel frustrated.

The Obama administration announced the rule just as Republican and Democratic voters prepared to go to the polls in Wisconsin, where presidential candidates from both parties are in close races in the state’s primary. Inversions have become a political flash point for both parties.

The Treasury Department’s move comes less than three weeks after Democratic Senator Bernie Sanders, who is seeking the party’s presidential nomination, sent a letter calling on Treasury Secretary Jack Lew to “take action to block the corporate inversion planned by the pharmaceutical giant Pfizer.”

Exit Tax

At a rally in New York on Monday, after the new rules were announced, Democratic presidential front-runner Hillary Clinton said she would “slap” companies leaving the U.S. to invert with an “exit tax.”

Speaking to voters in Wisconsin on Tuesday, Republican Donald Trump said the Obama administration has been unable to stop companies from leaving the U.S.

“We have so many companies leaving us, it is disgraceful,” he said. “The politicians don’t know how to stop it. They don’t have a clue.”

In a statement released Monday, Pfizer and Allergan said they are reviewing the Treasury’s actions and wouldn’t “speculate on any potential impact.”

Since the announcement Monday evening, Allergan shares have dropped more than 16 percent to $230.69 as of 11 a.m. in New York Tuesday. While Treasury Secretary Jack Lew said the measure would address “serial inverters,” he didn’t name any specific companies or transactions, and Treasury officials have said the rules aren’t targeted at any specific companies.

Earnings Stripping

Also Monday, the Treasury announced new rules that would make it more difficult to engage in a tax strategy known as “earnings stripping,” which enables U.S. subsidiaries of multinational companies to reduce their tax bills by issuing debt to their foreign parents.

Under those rules, which would apply to related-party transactions after April 4, certain securities of at least $50 million that were previously considered debt will be at least partially treated as stock. That would make it more difficult for foreign companies to load their U.S. units with related-party debt, according to a Treasury news release.

Obama on Tuesday referred to a massive disclosure of documents from a Panamanian law firm related to thousands of offshore shell companies and allegations of hidden wealth. “Tax avoidance is a big global problem,” he said. “Here in the United States, there are loopholes that only wealthy individuals have access to. They are gaming the system.”

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