Obama Executive Actions Targets Companies Seeking Lower Taxes Abroad

The Obama administration took executive action to shutter tax loopholes on companies incorporating abroad to escape high corporate tax rates in the United States.

President Barack Obama's tax inversion proposal have failed to gain support in Congress, but the White House has consistently stated executive actions could be on the way to take a more limited approach to address loopholes.

"Americans deserve to know big corporations aren’t playing by a different set of rules," President Barack Obama told reporters Tuesday at the White House. "I’ve been pushing for years to eliminate the injustices in our tax system."

(Mark Wilson/Getty Images)

According to the Treasury Department, the new rules will, “limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of U.S. companies.” This is meant to curb a larger U.S. company from merging with smaller foreign company for the purposes of paying taxes in that country with lower tax rates.

Obama said the companies that use the loopholes get the benefits of a U.S. customer base and workforce without paying for it.

“They renounce their citizen and declare somewhere else but get all the rewards of being an American company without paying taxes,” the president added.

This could likely affect pending mergers, such as the plan for U.S.-based Pfizer to acquire Irish-based Allergan for $150 billion.

Obama said the billions in unpaid taxes takes away money the federal government can spend on education and infrastructure.

“When companies exploit loopholes it makes it harder to invest in future,” Obama said. “A lot of these loopholes come at the expense of middle class families.”

Another rule would address earnings stripping, which involves an American company borrowing from the foreign parent company then using the interest payments on the loan to offset profits on financial statements.

“These actions took away some of the economic benefits of inverting and helped slow the pace of these transactions, but we know companies will continue to seek new and creative ways to relocate their tax residence to avoid paying taxes here at home,” Treasury Secretary Jacob J. Lew said in a statement. “Today, we are announcing additional actions to further rein in inversions and reduce the ability of companies to avoid taxes through earnings stripping. This will have an important effect, but we cannot stop these transactions without new legislation. I urge Congress to move forward with anti-inversion legislation this year.”