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Washington (AFP) — U.S. multinational companies are increasingly seeking to reincorporate overseas through mergers and acquisitions to escape U.S. taxes, raising concerns for the Obama administration.

“It’s the height of economic absurdity but most of all it’s symptomatic of the difficulties of the American tax system,” said Pascal Saint-Amans, head of the tax division at the Organization for Economic Cooperation and Development, in an interview.

The process, called a corporate, or tax, “inversion”, is based on a simple, legal principle: A company buys a foreign company and restructures to move its tax domicile to a lower-taxed foreign country.

The company typically keeps its management and activities in the United States, benefiting from U.S. government-funded infrastructure, research and development, and other advantages.

“It’s the most blatant tax-dodging technique,” Frank Clemente, executive director of Americans for Tax Fairness, told AFP.

Heavyweights in the pharmaceutical industry, like medical device maker Medtronic, and fruit and vegetable giant Chiquita Brands are preparing to reincorporate in Ireland where corporate tax rates of 12.5 percent are almost a third less than the U.S. rate of 35 percent.

Pfizer, the world’s largest drug maker, and rival AbbVie recently have added their names to the list of companies looking to shift their headquarters to a more advantageous tax system. Drug-store chain Walgreen also is weighing a tax inversion.

Generic drug maker Mylan joined the inversion wave on Monday, unveiling a deal to buy Abbott Laboratories’s non-U.S. developed markets business and transfer the combined company’s domicile to the Netherlands.

The head of Mylan defended the strategy — which could reduce the company’s tax rate from 35 percent to 21 percent — in the name of global competitiveness amid a “flawed” US tax system.

“What our country failed to do is keep pace and make our country globally competitive for corporations,” Heather Bresch, Mylan’s chief executive, said in an interview with business television network CNBC.

“So if you want to sit here and have a discussion about how do we handcuff US corporations to the United States, I think that’s unpractical and, quite frankly, ridiculous.”

– Political paralysis –

Facing a fiscal hemorrhage of tax revenues from the inversion trend, President Barack Obama’s administration is working to close the loophole.

Treasury Secretary Jacob Lew this week called on Congress to undertake business tax reform “to address this urgent issue.”

“Congress should enact legislation immediately … to shut down this abuse of our tax system,” Lew said in a letter dated Tuesday to lawmakers.

“What we need as a nation is a new sense of economic patriotism, where we all rise and fall together.”

But a proposal to ensure that a company cannot change its corporate tax domicile without a change in control of the company, enshrined in Obama’s fiscal year 2015 budget, remains in limbo.

In May, 14 lawmakers of Obama’s Democratic Party proposed a two-year moratorium on inversions, offering steps to reduce the tax loophole in support of the president’s proposal.

Under the legislation, a merged company will be treated as a foreign company only if the merger transfers 50 percent of its stock to shareholders of the offshore company, compared with the current 20 percent level.

“The Treasury is bleeding red ink, and we can’t wait for comprehensive tax reform to stop the bleeding,” said Senator Carl Levin, a lead sponsor of the bill.

But the paralysis in Congress this year ahead of November legislative elections means there is virtually no chance that a deal could be clinched with Republicans.

The U.S. business community, meanwhile, has an interest in keeping the status quo.

Unlike other countries, the United States taxes all the profits of all domestic companies, but allows them to indefinitely park foreign profits overseas untaxed.

Overseas U.S. corporate profits total more than $2 trillion, according research firm AuditAnalytics. By using a tax inversion, a company could “unpark” the money and use it without incurring US taxes.

“Unless Congress closes this loophole, corporations will keep on using it,” said Clemente, of Americans for Tax Fairness.

AFP Photo / Jewel Samad

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