A group of 18 former US Treasury Department officials today sent a letter to Treasury Secretary Jacob Lew, urging the government to reconsider recently issued tax regulations aimed at stopping US companies from inverting.
The signatories included George Shultz, who served as Treasury Secretary under Richard Nixon; John Taylor, who was Under Secretary of the Treasury for International Affairs in George W. Bush’s administration; and Curtis Hessler, Assistant Treasury Secretary for Economic Policy under Jimmy Carter.
In an inversion a US-parented company changes its tax domicile to a foreign jurisdiction to escape US taxation, typically by acquiring a smaller foreign company and locating the tax residence of the group in the foreign country.
The proposed and temporary tax regulations, issued April 4, make inversions less lucrative by stopping multinational groups from reducing their US tax liability following the inversion through “earning stripping.” Under this technique, following the inversion the US subsidiary is loaded with related-party debt so that large interest deductions can be taken against US income while the related income is recognized by another group member in a low or no-tax jurisdiction.
Another set of rules applicable to “serial inverters” appeared to be designed to stop Pfizer’s pending merger with Allergan, which has since been called off.
The former US tax officials said that the regulations will lead to more foreign companies buying US businesses and will result in US businesses moving capital and employees abroad to avoid paying US tax.
According to the authors, rather than stopping inversions, the US should revise its international tax system to lower the corporate tax rate and move to a territorial tax system so that foreign profits can be repatriated tax-free. Such changes are needed, the authors say, because US multinational corporations are ata disadvantage as compared to foreign companies, the authors say.
The following individuals signed the letter:
David Malpass, Deputy Assistant Secretary, Developing Nations, 1986–89; Roger Kodat, Deputy Assistant Secretary, Domestic Finance, 2001–07; James E. Carter, Deputy Assistant Secretary, Economic Policy, 2002–06; Robert Stein, Deputy Assistant Secretary, Macroeconomic Analysis, 2003–06; Nada Eissa, Deputy Assistant Secretary, Economic Policy, 2005–07; Kimberly Reed, Senior Advisor to the Secretary, 2004–07; Michael Desmond, Tax Legislative Counsel, 2005–08; Ike Brannon, Senior Advisor, Tax Policy, 2007–08; Lawrence Goodman, Director, Quantitative Analysis, 2003–05; JD Foster, Economic Counsel, Tax Policy, 2001–02; John J. Kelly Jr., Special Assistant, Tax Policy, 2001–05.
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