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US Corporate Inversions Back In The Spotlight

by Mike Godfrey,, Washington

11 July 2014

Based on information from the Congressional Research Service (CRS), Sander Levin (D – Michigan), the United States House of Representatives Ways and Means Committee Ranking Member, has issued details of an increasing number of "corporate inversions" since 1983, and has reignited a debate on how they should be stopped.

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 CRS list shows that 47 US corporations have reincorporated overseas through inversions in the last 10 years, as against only 29 in the previous 20 years. According to the data, there is estimated to be about ten prospective inversion deals that are pending completion.

Levin believes that the US needs to take prompt action to curb those deals, by passing legislation that would limit corporations' ability to benefit from these tax advantages. To that end, he recently introduced a bill into the House, at the same time as his brother, Chairman of the Senate Permanent Subcommittee on Investigations Carl Levin (D – Michigan), introduced a similar bill into the Senate.

"Barely a week seems to pass without news that another corporation plans to move its address overseas simply to avoid paying its fair share of US taxes," said S. Levin. "These corporate inversions are costing the US billions of dollars and undermining vital domestic interests. We can and should address this problem immediately through legislation."

The two 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. The restrictions would apply to inversions occurring after May 8, 2014.

However, those bills have yet to move forward as they have received little support from congressional leaders in either the Senate or the House. Senate Finance Committee Chairman Ron Wyden (D – Oregon) appears to want – rather than a short-term measure – to deal with the issue within the framework of 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.

However, the effect of the continued debate on corporate inversions in the US has reverberated over to Ireland, where international corporate law firm Cadwalader, Wickersham & Taft disclosed that its Chairman-elect and Corporate Group Co-Chair, James Woolery, has met with Ireland's Prime Minister Enda Kenny and Minister for Finance Michael Noonan, among others, to discuss US-to-Ireland inversions.

Cadwalader observed that "there is considerable sensitivity within the highest levels of the Irish Government to Ireland being perceived as a tax haven by the European Union (EU) and the US Congress. … Beyond reputational risk, senior officials note that a continuing trend of inversion transactions may place Ireland in an untenable fiscal situation. … The resounding concern is that Ireland bears the brunt of the reputational and economic impact of inversions but reaps little of the job creation, substantive investment, economic growth or other tangible benefits typically afforded by traditional foreign direct investment."

The firm expressed the belief that "it is important that US and other multinational corporations seeking to re-incorporate in Ireland do so with an eye towards making meaningful connections with the country."

"Although not a requirement," it concluded that "corporations should consider tangible investments beyond the requisite minimum of board meetings, including the establishment of accounting and treasury, legal, intellectual property and business development functions; the appointment of an Irish advisory board or resident Irish directors; and the establishment of regional trading or intellectual property hubs. An inversion with these features has the potential dual benefit of driving a positive market reaction around the company's strategic goals in the EU and elsewhere, as well as protecting the deal from being singled out as an example of a 'brass-plate' inversion," it concluded

TAGS: compliance | Finance | tax | investment | business | Ireland | law | mergers and acquisitions (M&A) | corporation tax | offshore | multinationals | legislation | transfer pricing | tax rates | United States | tax breaks | tax reform | European Union (EU) | Europe

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