FROM THE OFFICE OF PUBLIC AFFAIRS

Today the Treasury Department released its preliminary report on the issues arising in connection with the reincorporation of U.S.-based multinational corporations in foreign countries, sometimes referred to as "corporate inversion" transactions, and the implications of these transactions for U.S. tax rules.

"When we have a tax code that allows companies to cut their taxes on their U.S. business by nominally moving their headquarters offshore, then we need to do something to fix the tax code," stated Treasury Secretary Paul O’Neill.

"In addition, if the tax code disadvantages U.S. companies competing in the global marketplace, then we should address the anti-competitive provisions of the code. I don’t think anyone wants to wake up one morning to find every U.S. company headquartered offshore because our tax code drove them away and no one did anything about it. This is about competitiveness and complications in the tax code that put U.S.-based companies out of step with their foreign competitors."

"We will work with Congress to address these important issues quickly," O’Neill concluded.

An inversion is a transaction through which the corporate structure of a U.S.-based multinational group is altered so that a new foreign corporation, typically located in a low or no tax country, replaces the existing U.S. parent corporation as the parent of the corporate group.

In recent months, several high-profile U.S. companies have announced plans to reincorporate outside the United States. The documents prepared for shareholder approval and filed with the Securities and Exchange Commission cite substantial reductions in overall corporate taxes as a key reason for the transactions.

While the corporate inversion transactions are not new, there has been a marked increase recently in the frequency, size, and profile of the transactions. The Treasury Department has been studying the issues that arise in connection with this corporate inversion activity and the implications for the U.S. tax system and the U.S. economy. The Treasury Department concluded that the release of a preliminary report would be useful to the consideration of the issues posed by the increased inversion activity. The report describes the current law tax treatment of the transactions and of the companies post-inversion, and the features of current law that facilitate the transactions and that may be used to reduce inappropriately the companies’ tax burdens post-inversion. The report also describes the potential ramifications of reformulations of the tax laws, including in particular the long-term effect of such changes on the U.S. economy, that must be considered in the evaluation of changes to the tax laws.

Inversions are not the only transactions that result in an offshore headquarters. Companies can start up in a foreign jurisdiction. Also, U.S. companies that merge with a foreign company can decide to locate the headquarters of the merged companies outside the United States.

The report concludes that the policy response to the recent corporate inversion activity should be broad enough to address the underlying differences in the U.S. tax treatment of U.S.-based companies and foreign-based companies, without regard to how foreign-based status is achieved. Measures designed simply to halt inversion transactions may address the issues in the short run, but in the long run produce unintended and harmful effects for the U.S. economy.

A prompt and thoroughly-reasoned response is needed to address the U.S. tax advantages that are available to foreign-based companies through the ability to reduce the U.S. corporate-level tax on income from U.S. operations. Inappropriate shifting of income from the U.S. companies in the corporate group to the foreign parent or its foreign subsidiaries provides a competitive advantage to companies that have undergone an inversion or otherwise operate in a foreign-based group. Changes to the applicable statutory and regulatory rules is needed to ensure that any transaction that results in a new foreign parent of a corporate group with U.S. operations does not serve to facilitate an inappropriate decrease in tax on the U.S. income of the U.S. operations.

Further work also is needed to address the features of U.S. tax laws that may disadvantage U.S.-based companies relative to companies based in major trading partners, including the U.S. tax treatment of income from U.S. companies' foreign operations. A comprehensive reexamination of the U.S. international tax rules and the economic assumptions underlying them is needed to ensure that the system of international tax rules does not disadvantage U.S.-based companies competing in the global marketplace.

"As we address these important issues, we must do so in a way that maintains the position of the United States as the most desirable place in the world for people to do business. We must not undermine the fundamental strength of our economy," stated Acting Treasury Assistant Secretary for Tax Policy Pam Olson. "We want companies to keep their headquarters and their jobs here."