Pro-business or anti-America? Congress mulls action on overseas tax deals

Key lawmakers are sending mixed signals about whether they'll act to stop U.S. companies from moving their headquarters overseas for tax reasons.

Treasury Secretary Jack Lew took a high-profile stand this week, calling on American executives to show some "economic patriotism" and urging Congress to ban the deals, known as inversions, which Lew called an abuse of the tax code.

His words likely made some Medtronic executives squirm. The Twin Cities-based firm recently announced plans to buy an Irish company and shift Medtronic's address to Ireland, an inversion that will save it billions of dollars in taxes.

The deal will also add 1,000 more jobs in Minnesota, the company added, and that's the conundrum facing lawmakers.

• More: Medtronic's Irish deal reopens Minnesota tax debate

So long as the foreign profits of American companies remain overseas, they're not taxed. Once those companies bring the profits back to the U.S. they face a 35 percent tax rate, the highest in the world. So companies leave the money overseas instead of investing it in the U.S. and the government misses out on the tax revenue.

Banning inversions, though, may backfire, leading companies to cut payrolls if they have to pay more in taxes.

How is Congress likely to respond?

Many lawmakers don't want to be seen helping companies that are gaming the tax system, but they also worry about the unintended consequences of outlawing the deals.

Right now companies like Medtronic move their headquarters on paper, "but if you pass this anti-inversion language, then companies are going to physically move their headquarters and it's going to create more of a problem" and cost high-paying jobs, said Minnesota 3rd District Republican Rep. Erik Paulsen.

Paulsen and 33 other Republicans joined Democrats last week on a middle ground amendment that would ban awarding federal contracts to companies that moved their headquarters to tax havens in the Cayman Islands or Bermuda.

"Part of that was just to send the signals that this is a problem," Paulsen said. "It's going to become an emerging problem even more unless action is taken."

Lew on Wednesday said enough is enough.

"It's not right for an American firm to benefit from all of the things we do in the United States to make it a safe place to do business but then to say, 'I don't want to pay taxes here' and then shift my corporate address overseas to pay a lower tax rate or no taxes," he said at a conference hosted by the cable channel CNBC.

Lew wants Congress to ban the deals retroactive to May, which would likely torpedo the Medtronic-Covidien merger.

No one from Medtronic would agree to be interviewed Thursday, but the company has said this deal is mostly based on business strategy, not tax concerns.

That said, in an interview with MPR News late last month, spokesman Rob Clark also said that if the deal goes through, Medtronic plans to invest $10 billion of its overseas profits in the U.S.

"We have more flexibility to invest that cash in the U.S. as an Irish company than we would have as a U.S. company," he said.

The Medtronic-Covidien marriage would likely be annulled were Congress to retroactively ban tax inversion deals, said Debbie Wang, an analyst with the investment research firm Morningstar.

"I think it would make them re-think it because then, on balance, the advantages of the deal may not be quite worth what they thought it was going to be worth, especially at the price they're going to be paying," Wang said.

Sen. Al Franken said he supports a Senate bill "that would tamp down on corporate inversions" adding that he found the deals troubling.

Franken and Paulsen say the issue should be addressed ultimately as part of a larger tax reform package. That's been stalled for years, though. This spring, House Republicans declined to take up a tax reform plan put together by Ways and Means Chairman Republican Dave Camp of Michigan.

Paulsen suggested the issue might be tackled as part of a post-election deal that included a number of other tax provisions. But after three and a half years of showdowns, shutdowns and gridlock, it's been a losing bet to expect much of any action from Congress.

• Read Treasury Secretary Lew's letter to Congress

MPR News' Martin Moylan contributed to this report.