The debate over corporate tax reform intensified this week as U.S. drug marker AbbVie closed a deal to acquire Shire PLC, a Dublin-based company and reincorporate overseas. The deal is the latest in the recent wave of corporate inversions, a strategy used by companies to dodge the 35% U.S. corporate tax rate by reincorporating in “tax havens” like Ireland though the acquisition of a foreign entity.

Treasury Secretary Jack Lew urged Congress to take action to halt the increasing number of companies fleeing the U.S. for lower taxes.

“Congress should enact legislation immediately… We should have some economic patriotism here. It is important that this issue be addressed because we’re seeing an uptick in activity, of greater interest of companies moving overseas”

Recent estimates indicate that the U.S. stands to lose around $20 billion in revenue over the next decade if existing laws are not changed. Inversions are particularly popular among pharmaceutical companies who make large profits overseas and are reluctant to bring the money back to the U.S. in order to avoid double taxation.  U.S. companies currently have a total of around $2 trillion in foreign earnings that are unlikely to be repatriated unless existing tax laws are changed.

Bob Pozen of the Wall Street Journal has called for a reduction in the corporate tax rate financed through an across-the-board 17% tax rate on foreign earnings. As the system is currently structured, foreign profits are taxed at 35% but payment can be deferred indefinitely, resulting in trillions of dollars sitting overseas. The easiest way to access this money without being subject to a 35% hit: reincorporate in a tax haven like Ireland.

The longer Congress stalls on closing the inversion loophole, the greater the incentive U.S. companies have to capitalize on the opportunity while they can. Walgreen’s has indicated that it is heavily considering reincorporating in Switzerland, where the corporate tax rate sits at just over 17%, a move that would save it around $4 billion over the next four years. Other U.S. companies are sure to follow suit knowing the window of opportunity may soon be closing, illustrating the importance for swift Congressional action.

Corporate inversions are a direct threat to U.S. economic competitiveness and underscore a large flaw in our tax system. At a time when the U.S. needs to be doing everything it can to encourage investment into the U.S., corporate tax reform is sure to be a contentious issue leading into November’s midterm elections.

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