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Inversions trend continues to cause controversy

Medtronic and Covidien announced last weekend that they intend to complete a $43 billion tie-up and fellow US pharmaceutical company, AbbVie, is set to send a formal $31 billion offer for Irish rival Shire today: the trend of inversion transactions out of the US shows no signs of abating.

Politicians are not happy about corporate inversions, but Congressional Democrats and Republicans differ markedly about how to address them.

Congressman Sander Levin, a Democrat, was asked by Bloomberg if he would do the same thing if he was the CEO of, say, Medtronic, and saw an opportunity to mitigate the company’s 35% tax liability.

“First of all, Medtronic isn’t paying 35%,” said Levin. “They’re paying about half of that.”

Releasing profits that are trapped offshore is a commonly-cited justification for seeking to invert, but Levin is not convinced by this argument.

An inversion isn’t the way to look at dealing with this problem of cash trapped offshore,” said Levin, who went on to say he found it interesting that in certain contracts between companies looking at an inversion, it apparently states that “the deal is off if Congress acts”.

In other words, if Congress moves to alter the tax-related benefits of inverting, the companies are no longer interested in such a restructuring. Levin claimed that this indicates the move to invert is primarily related to tax.

Dealing with inversions

Levin and his brother, Carl, a Democratic senator from Michigan, have introduced a Bill which seeks to raise the foreign ownership requirement threshold from 20% to 50%.

Orrin Hatch, ranking, or most senior, Republican member of the Senate Finance Committee, said there are two ways to address inversions.

“The first way is to make it more difficult for a US corporation to invert,” said Hatch. “The second is to make the US a more desirable location to headquarter one’s business. I believe the latter is the way.”

“You have to do both,” responded Sander Levin. “You have to have tax reform, and you want to make it more attractive, but you also don’t want companies to leave the US and simply change their domicile to pay lower taxes. Look, we could have a lower tax but still Ireland would be lower and companies would continue to invert while keeping their major operations here in the US, so we don’t want phantom changes that essentially will hurt, I think, the tax structure of this country, and also will hurt the effort for companies that are basically American companies to stay here.”

“Remember, Medtronic uses the R&D tax credit in this country rather significantly so we don’t want companies to move their HQ overseas while retaining all the benefits they get from being an American company,” he added. “R&D is just one of them, they get other benefits from being here.”

Rather than targeting legislation at stopping the practice of inverting, taxpayers want Levin and his colleagues in Congress to take on tax reform.

John Engler, president of the Business Roundtable, an organisation representing the chief executive officers of America’s largest companies, echoed this view.

“Business Roundtable agrees with the Administration that comprehensive business tax reform is the best way to address the concern with inversions. The Roundtable has long advocated for tax reform to improve the investment climate, make the country more competitive and create more jobs,” said Engler. “The president and Congress should work together on the specifics of this needed tax reform. Piecemeal legislative reactions on inversions that come loaded with unintended consequences and fail to address the true anti-competitiveness of the US tax system are not the answer.”

But failure to agree a bipartisan path to reform has meant a tax code overhaul is unlikely in the short-term. Sander Levin said he is speaking with Medtronic about why it wants to invert and said he remains in favour of bipartisan tax reform but that the Republicans have gone their own way on the issue.

Engler said the volume of inversions being proposed at present is a symptom of both a failing tax system and failed leadership in addressing it.

“For years, experts have advised that the anti-competitive US corporate tax system is costing the US jobs, investment and economic growth,” he said. “The US has the highest corporate tax rate in the developed world and is one of the last industrialised countries using an outdated international tax system – one that disadvantages US companies seeking to compete in foreign markets and bring foreign earnings back to the US for reinvestment at home.”

But with reform some way off, and with research from the Joint Committee on Taxation showing that if the US stopped corporations from relocating overseas, it could raise almost $20 billion over a 10-year period (an estimate which does not include inversions that are still in progress, meaning the figure could be even higher), Sander Levin does not feel action can wait.

Inviting the morality debate

But multinationals may be shooting themselves in the foot by forcing through inversion transactions in anticipation of US anti-inversion legislation.

For one, such legislation could be applied retroactively, meaning the benefits taxpayers receive through an inversion could be reversed (as Sander Levin alluded to in his reference to the alleged clause in certain contracts relating to inversions), while another unintended consequence of such activity is that the tax and morality debate is likely to cross the Atlantic from Europe and begin to take hold in the US.

Jacob Lew, US Treasury Secretary, has already begun to steer the debate in this direction by urging companies to foster a “new sense of economic patriotism” in a recent letter to Levin, Hatch, Dave Camp, chairman of the House Ways & Means Committee, and Ron Wyden, his counterpart in the Senate Finance Committee, calling for the practice to be curbed.

Lew described the effect of inversions as “hollowing out the US corporate income tax base”. Though he, too, favours a tax reform-led approach, the unlikelihood of this means he is supporting separate legislation and recommends that it be retroactive to May 2014.

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