US Anti-Inversion Bill ‘Could Save More Revenue’

The Joint Committee on Taxation has increased, from USD19.5bn to more than USD33.5bn, its estimate of tax revenue that could be saved over a ten-year period from legislation to restrict corporate inversions introduced by Democrat lawmakers in the United States House of Representatives in May this year.

A recent letter from the JCT explained that the rise in revenue savings from the Bill is mainly due to an underestimation of the number of companies that wanted to pursue inversions deals. The JCT said its May 2014 forecast “did not properly reflect the appetite of some US corporations for inversions,” or “the increased inversion activity that has occurred over the last year, or has been announced.”

Under current law, a company that merges with an offshore counterpart can move its headquarters and tax residence 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 Stop Corporate Inversions Act of 2014, introduced by House Ways and Means Committee Ranking Member Sander M. Levin (D – Michigan), would include a proposal made by President Barack Obama in his 2015 Budget proposals to restrict corporate inversions by putting the minimum foreign shareholding cap at 50 percent.

The restriction would apply to inversions after May 8, 2014, and would effectively require US 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.

In September this year, the US Treasury Department introduced administrative measures to deter inversions, and, in particular, to prevent the methods by which inverted companies access a foreign subsidiary’s unrepatriated earnings while continuing to defer US tax. However, Levin has still expressed his belief that “inversions remain a serious problem that must be immediately addressed through legislation.”

While leading Democrat and Republican lawmakers now appear to consider tax reform – to cut the corporate tax rate and change the way the US taxes foreign earnings – to be the only real long-term solution for halting inversions, Levin professed that “action cannot wait for tax reform.”

“The Treasury Department’s proposed rules are an important step toward stemming the tide of inversions,” he added, “but the new [JCT] estimates make clear that immediate legislative action is necessary.”