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Levin Brothers Introduce US Anti-Inversion Legislation

by Mike Godfrey,, Washington

23 May 2014

Two brothers, Ranking Member of the House of Representatives Ways and Means Committee Sandy Levin (D – Michigan) and Chairman of the Senate Permanent Subcommittee on Investigations Carl Levin (D – Michigan), have introduced similar bills that would restrict the use of "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.

The two new bills would include a proposal made by President Barack Obama in his 2015 budget proposals – to restrict corporate inversions by putting the minimum foreign shareholding at 50 percent. However, the bill in the Senate would contain a two-year sunset clause, while in the House the restriction would be permanent. The restrictions would apply to inversions after May 8, 2014.

Carl Levin said that his "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," while another of the bill's Democrat sponsors, Sheldon Whitehouse (D – Rhode Island), added that "mergers should be driven by economics, not tax avoidance. When profitable corporations employ cynical strategies to avoid taxes, honest taxpayers pay the price."

"This bill is a necessary step to crack down on companies that use gimmicks to avoid paying taxes," concluded Dianne Feinstein (D – California), another sponsor. "What we need is a complete overhaul of the corporate tax code. Until that happens, Congress must act to prevent companies from exploiting loopholes that unfairly lower their tax bills."

In the House, Sander Levin pointed out that there has been 40 corporate inversions in the last decade, and that the 50 percent restriction would effectively require companies to merge with foreign companies that are roughly equal or larger in size in order to move their location for tax purposes outside the US.

"Corporate inversions are a growing problem," he commented, "costing the US tax base billions of dollars and undermining vital domestic investments. This egregious practice requires immediate action."

However, the bills did not appear, at first sight, to gain the support of congressional leaders in either the Senate or the House. Finance Committee Chairman Ron Wyden (D – Oregon) was reported to have indicated that, rather than a short-term measure, he would now prefer to deal with any problem within future comprehensive tax reform. Leading Republicans also seem to have decided that using tax reform to lower the corporate tax rate and having a more internationally competitive tax code would be the better option.

The Alliance for Competitive Taxation also noted that "the fact that we have seen a growing number of American companies in recent months announce plans to merge with foreign companies and reincorporate abroad only highlights the many deficiencies of the US tax code."

"The US has the highest corporate tax rate in the developed world and still uses an outdated system of international taxation, making it harder for American businesses to compete in the global marketplace," it continued. "We have serious concerns that the legislation proposed would do nothing to address the competitive disadvantages inherent in our tax code. We continue to believe that leaders in Washington should focus on enacting comprehensive tax reform that establishes a modern, globally-competitive tax system."

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

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