President Obama on Tuesday criticized loopholes that help protect offshore tax havens and U.S. companies that move abroad for lower tax rates.
"A lot of these loopholes come at the expense of middle-class families," Obama said during the White House press briefing adding that such companies are "gaming the system."
The president's comments come on the heels of the Treasury Department's new package of rules aimed at making "tax inversions" — when U.S. companies move abroad for lower tax rates — less financially appealing. The new regulations, the third round that Treasury has put forward on inversions, seek to limit internal corporate borrowing that shifts profits out of the United States.
"There’s always going to be illicit movement of funds but we shouldn’t make it legal," the president said.
And while tax inversions differ from the recently revealed murky network that helped world leaders and celebrities hide money in foreign accounts, the president drew a parallel and pointed out that tax avoidance is a global problem.
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The basic principle is the same, the president said.
"Making sure everybody is paying their fair share."
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In recent years tax inversions have sparked a political outcry.
Last November, drug companies Pfizer and Allergan announced a $160 billion deal that could save New York-based Pfizer hundreds of millions of dollars in U.S. taxes annually by moving its headquarters for tax purposes to Ireland, where Allergan is based.
Late Monday, Pfizer and Allergan issued a joint statement saying that they are reviewing the new Treasury rules and would not speculate on their potential impact. Investors, however, appeared to think the rules could undermine the two companies' deal, and sent Allergan's shares down nearly 22 percent in after-hours trading. Pfizer's shares rose about 2 percent.
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Treasury Secretary Jacob Lew said Treasury's new rules are designed to make inversions less economically beneficial for companies. But he again called on Congress to act to halt the practice.
"Only new anti-inversion legislation can stop these transactions," Lew said on a conference call with reporters. "Until that time, creative accountants and lawyers will continue to seek new ways for companies to move their tax residences overseas and avoid paying taxes here at home."
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Several Democrats have announced bills to make it harder for U.S. corporations to invert and President Barack Obama has included proposals in a package of measures to reform corporate taxes. But prospects for passing such legislation in an election year are not deemed high, given the wide differences between Democrats and Republicans on taxes.
In a statement, Sen. Charles Schumer, D-New York, praised Treasury's new set of proposals. But he said "the only way to slam the door on inversions for good is to pass tough, strong legislation and reform our tax laws."
Lew said the new Treasury proposals would also take aim at foreign companies that acquire multiple U.S. firms over a short period of time. Lew said these transactions were being done by what he called "serial inverters" in an effort to keep slashing their U.S. tax liabilities.
Some groups representing foreign companies with U.S. operations were critical of the new rules.
“The administration’s sweeping proposal will increase the cost of investing and expanding across the United States for all foreign companies and put at risk more than 12 million American workers that are supported by foreign direct investment in the United States," Nancy McLernon, president and CEO of the Organization for International Investment said in a statement. "This is a misguided approach that could have a freezing effect on attracting global employers and will damage U.S. competitiveness, which may very well be measured in lost jobs, wages and GDP.”
