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Congress Moves To Strengthen US Anti-Inversion Rules

by Mike Godfrey,, Washington

14 May 2014

After continued attention surrounding the bid from Pfizer Inc to acquire AstraZeneca plc, two senior Democrat Senators, Finance Committee Chairman Ron Wyden (D – Oregon) and Permanent Subcommittee on Investigations Chairman Carl Levin (D – Michigan), signaled moves to restrict the use of so-called "corporate inversions" by United States multinationals.

"Corporate inversions" have been used by US companies, when bidding for (generally smaller) foreign companies, as a means of moving away from the high American 35 percent corporate tax rate. Under current law, a company that merges with an offshore counterpart can move its headquarters abroad (even though management and operations remain in the US), and take advantage of lower taxes, as long as at least 20 percent of its shares are held by the foreign company's shareholders after the merger.

While John Koskinen, its Commissioner, is reported to have said that the Internal Revenue Service is doing all it can under the present tax rules to oppose such deals, President Barack Obama has already suggested, in his budget proposals, a restriction on corporate inversions by putting the minimum foreign shareholding at 50 percent.

In a statement on May 8, Levin confirmed that he is talking to his colleagues about legislation to close the loophole, which he "intends to introduce soon." In his opinion, "companies that exploit this loophole benefit from the protections and services the federal government provides, including patent protection, research and development tax credits, national security and more; they shouldn't be allowed to shift their tax burden onto others."

In like manner, in an op-ed for the Wall Street Journal written on the same day, Wyden disclosed that he intends to propose similar legislation, retroactive to May 8, 2014, to discourage corporate inversions. "I don't approach retroactivity in legislation lightly," he noted, "but corporations must understand that they won't profit from abandoning the US."

While Wyden has also called for comprehensive tax reform so as to cut the US corporate tax rate towards a more internationally-competitive level, the Republican Party appeared to be moving towards dealing with any corporate inversion problem within that reform.

For example, in his speech to the Senate, Finance Committee Ranking Member Orrin Hatch (R – Utah) concluded that, "broadly speaking, there are two different ways to address the problem of inversions. The first way is to make it more difficult for a US corporation to invert. The second way is to make the US a more desirable location to headquarter one's business. I believe the latter is the better way. That would mean lowering the corporate tax rate and having a more internationally competitive tax code."

TAGS: Finance | tax | business | law | mergers and acquisitions (M&A) | corporation tax | multinationals | legislation | tax rates | United States | tax breaks | tax reform

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