A cup of Tim Hortons coffee is pictured Burger King Whopper at a Burger King restaurant in Toronto on Monday August 25, 2014.Chris Young/The Globe and Mail
The Obama administration wants U.S. executives to think twice about buying international rivals to avoid taxes, a gambit that will test Washington's ability to spook corporate America into giving up on an increasingly popular business strategy.
U.S. Treasury Secretary Jacob Lew used a speech Monday to raise the stakes, saying the spike in the number of American companies contemplating schemes to move their headquarters abroad could undermine efforts to control the U.S. federal budget deficit. He reiterated that he is looking into rewriting regulations to make fleeing the U.S. less attractive, and suggested that any regulatory or legislative response should be retroactive to "early" May of this year. That would include the proposed takeover of Tim Hortons Inc. by Burger King Worldwide Inc., a $12.5-billion deal that many say is the latest example of the so called "tax inversion" strategy.
"This may be legal, but it is wrong, and our laws should change," Mr. Lew said at the Urban Institute, a think tank based in Washington.
Mr. Lew's comments were directed specifically at the strategy of purchasing a company in a lower-tax jurisdiction, and then moving to the home country of the acquired entity. The practice is called an "inversion," and it avoids rules that prevent U.S. companies from simply moving their headquarters to lower their tax rates.
Burger King's proposed purchase of Tim Hortons is an inversion, as the hamburger chain intends to make Canada the merged company's new home.
"By effectively renouncing their citizenship but remaining here, these companies are eroding America's corporate tax base," Mr. Lew said. "If we allow the incentives to pursue these deals to remain in place, we run the risk of undoing the progress we have made to reduce our federal budget deficit."
Political displeasure with inversions sharpened last month after the Burger King announcement, as it suggested the inversion phenomenon was spreading. Previously, many of the inversion proposals involved health-care and pharmaceutical companies.
"The pace of these deals has accelerated in recent months, with an increasing number of corporations on the verge of completing such mergers and many more, across a variety of industries, in the works," Mr. Lew said, without naming any specific agreements.
Burger King said Canada's lower tax rates were only a minor consideration in its decision to pursue Tim Hortons. Canada was chosen for the headquarters because it represented the merged company's biggest market, executives said.
The timing of Mr. Lew's remarks was significant. Lawmakers were returning to Washington on Monday from their summer break and some are threatening to block inversions with legislation. Charles Schumer, the No. 3 Democratic leader in the Senate, has written a bill that penalizes attempts by inverted companies to pull money out of the United States, Bloomberg News reported Monday, citing a draft of Mr. Schumer's proposal.
It's unclear whether Washington has the wherewithal to make good on its threats to stop inversions. U.S. Congress is scheduled to remain in session for only two weeks before it breaks again, this time until after the midterm elections in early November. The prospects of Mr. Schumer or any other lawmaker bridging the rigid partisan divide on Capitol Hill with an election so close is seen by many political observers as improbable.
Mr. Lew said the administration was "clear-eyed" about the likelihood of a legislative response to inversions. He said the Treasury Department was studying what it could do on its own to make the strategy "less economically appealing," and that he would make a decision "in the very near future."
Yet tax experts are split on whether Burger King and other companies have anything to fear from Washington.
Mr. Lew's appearance at the Urban Institute was followed by a panel debate on the subject. John Samuels, senior counsel of tax policy at General Electric Co., said tinkering with the regulations that support the tax code would do little more than irritate lawmakers. It would be far better to build goodwill to overhaul business taxes, something that should be possible after the election, Mr. Samuels said. "The house isn't on fire," he said.