US plans new moves to discourage tax-dodging mergers

The US Treasury plans new measures to discourage American companies from merging with foreign businesses to cut their US tax bills via so-called tax inversions.

Just weeks after drug giant Pfizer unveiled such a deal, Treasury Secretary Jacob Lew told members of Congress in a letter obtained by AFP Thursday that corporate inversions are a "serious problem" that erodes the US tax base.

"The principal purpose of such a transaction is not to grow the underlying business, maximize synergies, or pursue other commercial benefits. Rather, the primary purpose of the inversion is to reduce taxes, often substantially," he said.

Lew said the Treasury would announce this week new administrative actions "to deter and reduce further the economic benefits of corporate inversions."

Inversions involve a US company buying a foreign company domiciled in a low-tax location, such as Ireland, and then adopting the business address of the company, to avoid paying higher US taxes.

The strategy has been popular especially in the pharmaceutical industry, and is behind the massive proposed deal for Pfizer to buy Ireland-based Allergan for some $113 billion.

President Barack Obama has been outspoken against inversions, and the Pfizer deal has drawn strong criticisms in some quarters. In a statement Thursday, Democratic Congressman Sander Levin hit out at the company.

"The fact that American companies, including Pfizer, continue to pursue inversions makes clear that additional steps are needed to stop this trend," Levin said.

In his letter, Lew said the Treasury cannot stop inversions with the limited authority it has and urged Congress to remove the incentives in the tax laws that encourage such mergers.

"Unless and until Congress acts, creative accountants and lawyers will continue to find new ways for companies to move their tax residences overseas and avoid paying taxes here at home," he said.