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US Congress Urged To Deny Contracts To Inverters

by Mike Godfrey,, Washington

01 August 2014

With pressure growing for the United States Congress to move forward on legislation to halt the flow of "corporate inversions" in the short-term, the Fair Federal Contracts Act has been introduced in both the Senate and the House of Representatives, to add a provision to prohibit federal contracts going to corporations that reincorporate overseas.

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 may remain in the US), and take advantage of the lower corporate tax rates in foreign jurisdictions as long as at least 20 percent of its shares are held by the foreign company's shareholders after the merger.

While accepting that rate-reducing corporate tax reform and a more internationally competitive tax code would be longer-term solutions, Democrat lawmakers have joined recently to propose legislation that would restrict corporate inversions immediately.

Two companion bills introduced by Sander Levin (D – Michigan), the House Ways and Means Committee Ranking Member, and his brother, Chairman of the Senate Permanent Subcommittee on Investigations Carl Levin (D – Michigan), would attempt to curtail inversions by putting the minimum foreign shareholding at 50 percent. The provision would also be retrospective and apply to inversions occurring after May 8, 2014 (when the change was first talked of in the Senate).

The Fair Federal Contracts Act would retain the stipulation that American shareholders of the old US corporation should own at least 50 percent, but would also ban federal agencies from awarding contracts to companies that reincorporate overseas and "do not have substantial business opportunities in the foreign country in which they are incorporating."

The bill has been introduced by Democrats in both the Senate – Dick Durbin, the Assistant Majority Leader, and Carl Levin – and in the House – Rosa DeLauro (D – Connecticut) , co-chair of the Democrat's Steering and Policy Committee, and Lloyd Doggett (D – Texas), who serves on the Ways and Means and Budget Committees.

"With every successful inversion, the tax burden increases on the rest of us to pay what the corporate inverter doesn't," said Durbin. "The burden is made worse by allowing companies to profit off of federal contracts paid for by US taxpayers, while those very companies run from their US tax responsibility. We should make permanent the long-standing ban on federal contracts for corporations that have renounced their American corporate citizenship."

"For too long we have let companies avoid their tax obligations at the expense of companies who pay their fair share," DeLauro added. "Even worse, the federal government has been subsidizing this bad behavior, by continuing to reward inverted companies with lucrative federal contracts. These companies take advantage of our education system, our research and development incentives, our skilled workforce, and our infrastructure, all supported by US taxpayers, to build their businesses. But when the tax bill comes due, they hide overseas."

It is seen as unlikely that these Democrat proposals will move forward in Congress any time soon, given that the Republican Party has generally been against any short-term solution, and has insisted that the corporate inversion problem should be dealt with only within a comprehensive tax reform solution.

For example, while Senate Finance Committee Ranking Member Orrin Hatch (R-Utah) has hinted that "there may be steps that Congress can take to at least partially address this issue in the interim," he has also warned that the current legislative proposals, "rather than incentivizing American companies to remain in the US, would build walls around US corporations in order to keep them from inverting," and could have unintended consequences.

He has concluded that "whatever approach we take should not be retroactive or punitive. And, it should be revenue neutral. … Most importantly, it should not impede our overall progress toward comprehensive tax reform."

TAGS: compliance | Finance | tax | business | tax compliance | law | corporation tax | legislation | transfer pricing | United States | tax breaks | tax reform

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