Bramwell’s Lunch Beat: Wyden Wants to Plug ‘Inversion’ Loophole

Jason Bramwell
Staff Writer and Editor
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US ready to join six-nation tax alliance
Rob Taylor of the Wall Street Journalreported today that the United States will likely join China and four other countries in an alliance to fight efforts by multinational corporations to avoid paying taxes, according to people familiar with the matter.

The alliance, an Australian initiative, will also include Japan and Britain. The United States could sign on this week during a two-day meeting in Tokyo on fighting corporate tax avoidance, people familiar with the US position told the Wall Street Journal.

“Australia has pulled together six major countries to sit down and share intelligence on the activities of multinational enterprises,” Australian Tax Commissioner Chris Jordan told the Wall Street Journal in an e-mailed response to questions, according to the article.

“This collaboration has allowed us to better understand what is happening in our own countries and determine whether what is being represented in one country reflects what is being represented in another.”

Governments around the world are mobilizing to collect more taxes from multinational corporations that use tax havens and other legal methods to pay minimal or no taxes to national governments, Taylor wrote. According to some estimates, the world's governments lose $3 trillion in tax revenue a year to such efforts.

We must stop driving businesses out of the country
In an op-ed yesterday for the Wall Street Journal, Senate Finance Committee Chairman Ron Wyden (D-OR) noted that in pursuit of lower taxes, about 50 US companies have leveraged an “inversion” tactic in the past 30 years – merging with smaller foreign companies and moving their headquarters overseas. More than 20 have done so in the past two years.

The senator said that while they may not be breaking US laws, many of these companies are navigating a loophole in America's broken and dysfunctional tax code. He said Congress has a responsibility to reverse this tide – now.

“Legal or not, this loophole must be plugged,” he wrote. “Current law requires that US companies reincorporating overseas must ensure that at least 20 percent of their stock is owned by their new, foreign partner. As chairman of the Senate Finance Committee, I am committed to raising this floor to at least 50 percent for all inversions taking place from May 8, 2014, on. I don't approach retroactivity in legislation lightly, but corporations must understand that they won't profit from abandoning the United States.”

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.”

[Click here to read a Reutersarticle on Senate Democrats proposing a bill to stop corporate inversions.]

Pfizer holders could face tax hit in a deal for AstraZeneca
Speaking of inversions, Pfizer Inc. is trying to use that tactic in its deal to purchase pharmaceutical rival AstraZeneca PLC. But according to a Wall Street Journalarticle by Laura Saunders and Jonathan D. Rockoff, some longtime Pfizer shareholders face a big tax bill on gains if the deal goes through.

The blow stems from a little-known provision of US tax rules that is triggered when a US company buys a firm overseas and relocates there to reduce its taxes. Pfizer, as part of its $106 billion bid to buy AstraZeneca, said the combined company's residence would be in the United Kingdom.

But under US rules, Pfizer shareholders with stock in taxable accounts would owe capital gains tax on the appreciation in their shares when they are converted into stock in the merged company, Robert Willens, an independent tax expert based in New York, told the Wall Street Journal. Shareholders who hold stock in tax-deferred accounts, such as IRAs and 401(k) plans, wouldn't typically owe tax as a result of a deal, he said.

Willens also told the Wall Street Journal that the timing of the proposed deal is unfortunate for Pfizer’s US shareholders. The IRS, just days before the company unveiled its offer, closed a tax loophole involving repatriated earnings that had existed since 2011. The provision could have let Pfizer avoid triggering the tax on its shareholders, he said, according to the article.

IRS to turn over all Lerner e-mails to Ways and Means
House Ways and Means Committee Chairman Dave Camp (R-MI) said yesterday that the IRS has agreed to give the panel all e-mails sent by former agency official Lois Lerner relating to the IRS targeting scandal.

“While it is good that we are finally getting these e-mails, it should never have taken this long,” Camp said in a statement. “The agency is finally doing what is right and hopefully this is the last of the delays. It is almost a year to the day since Lois Lerner ‘apologized’ for the IRS’s targeting of conservative groups, and we need to get to the bottom of this. These documents are critical to an investigation that is holding the IRS accountable and ensuring the constitutional rights of these groups are never trampled on again. The committee will thoroughly review the Lerner documents and follow them wherever they may lead.”

The House of Representatives on Wednesday voted to hold Lerner, the former head of the IRS Exempt Organizations division, in contempt of Congress.

Congress could put Lois Lerner in jail all by itself – but probably won’t
Gregory Korte of the USA Todaywrote on Thursday that there are three possible ways that the House could seek to compel Lerner to testify about her alleged targeting of conservative groups. Each involves a different branch of government.

One is a rarely used option that would be the most confrontational: Congress could send its own sergeant-at-arms to arrest Lerner and bring her to the Capitol. The House of Representatives would hold a trial, serving as its own jury. But as a recent report by the Congressional Research Service points out, there are drawbacks: Lerner could not be held longer than the current Congress, which ends at the end of the year, Korte noted.

States blame fiscal cliff for tax revenue slide
Reid Wilson of the Washington Postwrote yesterday that tax revenues have dropped in numerous states for the first time since the end of the great recession, in large part due to lingering effects from the fiscal cliff negotiations that embroiled Congress at the end of 2012.

As a result of those negotiations, the expectation that tax rates would rise led many money managers, corporations, and high-income earners to report income or sell stock at the end of 2012, Wilson noted. Those transactions resulted in huge windfalls in the first half of last year, when personal income tax revenue soared 18 percent and corporate income taxes rose about 10 percent.

Now states are seeing the downside: Corporate tax rates declined in 20 states in the first quarter of 2014, while personal income tax revenues fell in 10 states.

“We had this unusually strong year in 2013, attributable in a lot of places to capital gains,” said Brenna Erford, who manages state budget policy work at the Pew Charitable Trusts, according to the article. “A lot of taxpayers were making this very conscious choice to take those gains in the prior year to avoid tax changes.”

Quick Links:

  • Going Concern presents: Missed connections for CPAs (Going Concern)
  • Fannie Mae confident that a $4 billion accounting error is totally not material, guys (Going Concern)
  • FEC OKs bitcoin campaign donations (Politico)
  • Tax evasion: The data revolution (The Economist)
  • An end to inversions? (Tax Analysts)
  • Amazon UK boycott urged after retailer pays just £4.2m in tax (The Guardian)
  • Texas strip clubs lose appeal on pole tax (Texas Tribune)
  • Corporate tax reform is dead – so why are companies fighting it so hard? (Yahoo! Finance)
  • Final rules on fiduciary fees are issued (Journal of Accountancy)
  • Small NJ retailers opposed to Christie’s proposed e-cigarette tax form association (The Star-Ledger)
  • Raise the federal gasoline tax, yes, but don’t then spend the cash on the roads (Forbes)
  • Business structure dictates tax treatment for professional traders (Forbes)
  • Taxing employer-sponsored insurance would hike Social Security benefits but boost federal coffers (TaxVox)


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