Bills in Senate and House Look to Limit ‘Inversion’ Deals

A bill introduced by Senate Democrats on Tuesday is aimed at curbing mergers that result in US companies paying less in taxes because their new legal tax residence is overseas – a tactic known as an “inversion.”

The bill, Stop Corporate Inversions Act of 2014, which was introduced by Senator Carl Levin (D-MI) and cosponsored by 13 other Democratic senators, would impose a two-year moratorium on inversions. Similar legislation was introduced in the House today by Carl’s brother, Representative Sander Levin (D-MI). There were nine other Democrats who cosponsored the House bill.

Both bills largely mirror an anti-inversion proposal by President Obama in his 2015 budget that would raise $17 billion for the government over the next decade. The legislation would apply to inversions completed after May 8, 2014.

Under the proposed Senate bill, US companies that try to buy a foreign company and relocate their headquarters to a lower-tax country would have to ensure that shareholders of the non-US company own at least 50 percent of the combined company – up from 20 percent under current US tax law, Richard Rubin of Bloomberg reported today.

According to the bill, the inverted firm would continue to be treated as domestic for US tax purposes if management and control of the merged company remains in the United States and either 25 percent of its employees or sales or assets are located in the United States.

“These transactions are about tax avoidance – plain and simple,” Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations, said in a written statement. “Our legislation would clamp down on this loophole to prevent corporations from shifting their tax burden onto their competitors and average Americans while Congress is considering comprehensive tax reform.”

“Corporate inversions are a growing problem, costing the US tax base billions of dollars and undermining vital domestic investments,” Sander Levin, ranking member of the House Ways and Means Committee, said in a written statement. “This egregious practice requires immediate action. This legislation would stop American companies from avoiding US taxes simply by purchasing a smaller foreign company.”

The legislation is responding to 14 companies that have conducted mergers since 2011 in which they moved headquarters outside the United States and into a lower-tax jurisdiction, according to Bloomberg. Other companies, including Pfizer Inc. with its proposed purchase of British rival AstraZeneca PLC, have considered using such transactions.

If the Pfizer/AstraZeneca deal goes through, Pfizer would pay the UK corporate tax rate of 20 percent versus the US corporate tax rate of 35 percent. Pfizer paid a 27.4 percent effective tax rate last year, compared with 21.3 percent for AstraZeneca, according to regulatory filings, Liz Hoffman of the Wall Street Journal reported last month. However, AstraZeneca on Monday rejected Pfizer’s $118 billion “final” takeover offer, leaving the merger in doubt.

“By exploiting other tax loopholes, Pfizer already pays little in federal taxes, but its proposed inversion to pay even less goes much too far,” Representative Lloyd Doggett (D-TX), one of the 10 cosponsors of the House bill, said in a written statement. “Congress should act now to prevent multinationals from demanding the benefits of being American without paying for them.”

The Senate bill would have a two-year life to allow time for Congress to work on comprehensive corporate tax reform, lawmakers said. However, it stands little chance of becoming law, as Republicans say any changes must be considered only as part of a broader revamp of the tax code, according to the Bloomberg article.

In a May 8 op-ed in the Wall Street Journal, Senate Finance Committee Chairman Ron Wyden (D-OR) wrote that pointing a finger at companies that reincorporate overseas “would be ignoring our own failure to bring the tax code into the 21st century. An uncompetitive tax code strains our economy, and we should not be surprised when corporations fight to get out from under antiquated tax rules.”

Wyden also believes that reducing the current 35 percent corporate tax rate by approximately one-third will bring the United States in line with other developed countries “that long ago recognized the need to evolve their policies to compete globally while growing their domestic economies.”

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