Inversion and Politics

Inversion and Politics

With so much news about US-based companies moving overseas to avoid taxes (Burger King, anyone?), I set out to do some research on the matter and to see what is being done about it. Our friends at the Wall Street Journal wrote a very poignant article on this subject and its future which I’d like to share that with you all today.

Two new developments in negotiations over taxes could signal improving prospects for legislation to restrict inversion deals, as lawmakers seek bipartisan solutions to address growing problems in the U.S. tax system.

A top Senate Democrat, Charles Schumer, said on Tuesday that he will offer legislation to restrict inversions, and would agree to allow it to lapse after three years.

Meanwhile, some lawmakers also are weighing the possibility of combining anti-inversion legislation with some significant tax breaks that Republicans want, such as a permanent tax credit for business research, according to people familiar with the situation. That could be combined with tax breaks that Democrats would like to make permanent, such as for college tuition.

Those discussions are preliminary, however, and could run into opposition, given concern about the high budgetary cost.

Many Republicans have resisted Democrats’ calls for specific new legislative restrictions on inversions, insisting instead that Congress rewrite the tax rules to make the U.S. more attractive to businesses.

Under Mr. Schumer’s plan, if Democrats block GOP efforts to push through a tax-code rewrite over the next three years, Republicans could allow the restriction on inversions to expire, unleashing a new wave of the cross-border deals.

In an inversion, a U.S. company moves its tax address to a tax-friendlier country, typically through a merger with a smaller foreign company. A 2004 law sharply restricted the practice, but lately a new inversion wave has begun. Members of both parties worry about the long-term impact on the U.S. economy and the tax base if it continues.

Republicans “want to use the inversion loophole as a way to get to tax reform,” Mr. Schumer said in an interview. “I understand that. [So] we propose that our bill would expire at some point in 2017. And that creates a trigger to undertake tax reform… [Republicans] will have leverage” to force a broader overhaul.

The Treasury Department is weighing regulatory steps to curb inversions, but Secretary Jacob Lew said this week that it’s “imperative” that Congress act.

All of the discussions on inversion legislation are focused on possible action in the lame-duck session that is expected after the November election.

But a number of obstacles could prevent any action, even in November. Democrats themselves are divided over what to do about inversions, for example.

And Republicans say they are annoyed that Democrats have used the issue to blame them for inaction in the run-up to the November elections. Republicans could decide to hold out for a business tax overhaul next year.

The sheer complexity of pulling off a deal could be another major hindrance.

A new Wall Street Journal/NBC poll shows strong support for congressional action. About 59% of registered voters said they believe Congress should take action to “penalize and discourage companies” from inverting because it results in lost tax revenues in the U.S. About 32% disagreed, saying companies “have a duty to their shareholders to lower costs and grow their business.”