Continuing theme of U.S. firms reincorporating overseas for tax purposes

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The Obama administration joined the growing debate over U.S. companies reincorporating overseas for tax purposes, urging lawmakers to pass legislation to limit the moves.

In a letter to leaders of the congressional tax-writing committees, Treasury Secretary Jacob Lew said lawmakers "should enact legislation immediately…to shut down this abuse of our tax system." The letter was reviewed by The Wall Street Journal on Tuesday night.

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Just this week, two U.S.-based drug firms— AbbVie Inc. ABBV +0.11% and Mylan Inc. MYL +1.81% —moved ahead with plans for foreign mergers that would allow them to move overseas and reduce their tax rates. They would join a growing list of about 50 U.S. firms that have reincorporated overseas through inversion in the last 10 years, most of them since 2008.

The trend appears to have accelerated in recent months, as Congress has come up short in an effort to pass a comprehensive tax-code rewrite that would address corporate concerns and make the U.S. system more business-friendly.

Meanwhile, the Obama administration in its budget earlier this year had proposed tightening the rules to substantially limit inversions. Fearing that the government might try to nix the moves, some companies and their advisers recently have been scrambling to get deals signed. To protect themselves from such legislation, companies increasingly are adding details to merger agreements that allow them to walk away from a deal without paying a penalty, or breakup fee, should the tax advantage suddenly be taken away.

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As more firms are moving to reincorporate in countries with tax advantages, lawmakers remain divided over Washington's response. So far, Republicans as well as some influential Democrats in Congress have favored limiting inversions through a comprehensive overhaul. Some of those lawmakers believe a quick fix could worsen U.S. companies' position.

"I don't want to be part of legislation that ramps up the competitive disadvantage of being a U.S.-based company or makes U.S.-based companies more attractive targets for foreign takeovers," Sen. Orrin Hatch of Utah, the top Republican on the Senate Finance Committee, said in a recent statement.

Finance Committee Chairman Ron Wyden (D., Ore.) also hasn't pushed for a quick fix. In a Wall Street Journal op-ed in May, he said that "this loophole must be plugged." But he indicated that he is still hopeful for a comprehensive tax rewrite that would limit inversions on a retroactive basis.

In the Treasury letter, Mr. Lew criticized corporations that move overseas to avoid the relatively high U.S. corporate tax rate, while continuing to operate from U.S. soil and benefiting from U.S. legal protections, infrastructure and basic research.

"What we need as a nation is a new sense of economic patriotism, where we all rise or fall together," Mr. Lew wrote. "We should not be providing support for corporations that seek to shift their profits overseas to avoid paying their fair share of taxes."

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