By Patrick Rucker and Kevin Drawbaugh
WASHINGTON (Reuters) - An influential U.S. senator is encouraging the Internal Revenue Service to stamp out deals that allow companies to relocate their headquarters overseas in search of lower tax rates.
Senator Carl Levin, who has railed for years against tax policies he has labeled costly loopholes, said the Obama administration should not wait for Congress to curtail a growing trend of transactions known as "inversions."
"There are so many of these transparently phony transactions that can be pierced if you have an Internal Revenue Service that will look at the real world, rather than the fake structures that are created," Levin told Reuters in an interview on Thursday.
The top U.S. corporate tax rate of 35 percent is among the world's highest and has been a key factor in a string of companies seeking to cut their tax bills by reincorporating abroad, usually through a foreign acquisition.
The move puts companies' foreign earnings out of the reach of the IRS and makes other tax-avoiding moves easier to do.
Many lawmakers have discouraged the practice, and President Barack Obama condemned it as unpatriotic this week, saying "hard-working Americans" would have to pay for the lost revenue.
With legislation unlikely to pass in the divided Congress, a debate has emerged over whether the Obama administration can act unilaterally to curb inversions.
Treasury Secretary Jack Lew told CNBC in mid-July that the IRS could not act on its own to prevent inversions through the existing tax code. However, Obama said on Wednesday that his administration would look for ways of discouraging inversions on its own.
Levin, in the interview, said federal agencies must push their authority to the limit.
"A court might tell you you're wrong, of course," he said.
"But many of these concoctions are just that - tax avoidance schemes that have very little basis in economic reality."
RETREATING OR DOUBLING DOWN
Companies seeking inversion deals have responded differently to the pressure from Washington.
On Wednesday Walgreen Co., which operates the largest U.S. drugstore chain, backed away from a plan to move its tax domicile overseas as part of buying out Europe's biggest pharmacy chain, Alliance Boots [ABN.UL]. The reversal was unpopular with investors, who knocked Walgreen's shares down by about 14 percent.
On the other hand, Mylan Inc Chief Executive Heather Bresch said on Thursday that political opposition would not prevent the pharmaceutical company's purchase of some non-U.S. businesses from Abbott Laboratories.
Inversions are legal, and the U.S. government has been writing rules on them for decades. No two deals are identical and the deals have changed shape over time along with the IRS's rules.
They essentially involve a U.S. corporation buying or forming a foreign company, then shifting its tax domicile out of the United States and into the foreign company and its home country. Redomiciling for tax purposes does not usually mean that a U.S. company fully leaves home.
Levin, a Michigan Democrat, is chairman of the Senate Permanent Subcommittee on Investigations, a powerful panel that frequently probes tax-avoidance strategies by corporations.
He has introduced an anti-inversion bill in Congress that would make such deals harder to achieve. But it is unlikely to become law because Congress is deadlocked on other issues that have consumed their attention.
His comments on Thursday came days after three other prominent Democratic senators - Richard Durbin, Elizabeth Warren and Jack Reed - urged Obama to use his executive authority to crack down on the practice.
(Reporting by Patrick Rucker and Kevin Drawbaugh; Editing by Ros Krasny, Karey Van Hall and Frances Kerry)