No US Bipartisan Anti-Inversion Legislation In Sight

While Senate Democrats continue to examine specific legislative proposals to deter US multinationals from using corporate inversions to move their tax residence abroad, Republicans remain insistent that any specific anti-inversion legislation should be explicitly linked to comprehensive tax reform.

A new bill has been put forward by Charles Schumer (D – New York) and Richard Durbin (D – Illinois), which would seek to restrict “earnings stripping.” Proposals from Democrat lawmakers, up to now, would put the minimum foreign shareholding to be held by the foreign company’s shareholders after a merger at 50 percent, rather than the present 20 percent, and add a provision to prohibit federal contracts from going to corporations that have reincorporated overseas.

Schumer’s bill is designed to prevent inverted companies from loading their US subsidiary with “excessive” debt after an inversion, to prevent multinationals from deducting substantial interest payments to further reduce US tax liability. Contrary to what had been expected, it does not include provisions to give the measures retroactive effect as far back as April 17, 1994.

The legislation would reduce the permitted net interest expense to no more than 25 percent of a subsidiary’s adjusted taxable income (down from 50 percent) and repeal the interest expense deduction carry-forward and excess limitation carry-forward. Inverters would not be able to take advantage of the deduction in future years, and the Bill would require the US subsidiary to obtain Internal Revenue Service pre-approval of related-party transactions each year, for ten years immediately following an inversion.

Schumer and Durbin said that they would work with Senate Finance Committee Chairman Ron Wyden (D – Oregon) on his efforts to put together a comprehensive package of legislative proposals to address corporate inversions.

In a statement, Wyden said it is “clear there is an opportunity for bipartisan agreement on short-term legislation that will make inversions less attractive.” He said he remains “committed to working across the aisle to find a solution.”

However, during a speech to the US Chamber of Commerce, Finance Committee Ranking Member Orrin Hatch (R – Utah) reiterated his support for an immediate overhaul of the tax code and said the specific anti-inversion legislative proposals made so far are “punitive and retroactive.”

“They are not designed to improve the business climate in the US. Instead, they are intended to build walls around American corporations.” He said any stopgap measures to address corporate inversions must meet the four principles he outlined earlier this year: that any proposal has to be revenue neutral; serve as a bridge to comprehensive tax reform; not be retroactive or punitive; and move the tax code toward a territorial tax system. Hatch said these criteria are non-negotiable, but “it appears that none of the proposals [put forward so far] come close to meeting these four essential criteria.”

In addition, Dave Camp (R – Michigan), the House of Representatives Ways and Means Committee Chairman, said that standalone efforts have failed, and said the only real solution to inversions is to cut the corporate tax rate and change the way the US taxes foreign earnings.

After referring to his own plan for an “overhaul of the broken US tax code, which would lower rates by simplifying the code and eliminating special interest loopholes,” Camp argued that the Administration has never put forward a real tax reform plan. He surmised that “the Treasury Department has completed – or is very close to completing – such a plan, but refuses to make it public.”

“It is time for the Administration to fill in the details of its so-called tax reform framework so we can finally start seeing what a modern American tax code could and should look like. Until we address the root of the problem, we will continue to read regular reports of companies leaving the US.”