Congressional tax writers spent much of last week debating anti-inversion tax proposals as the Obama administration continued to push for a response to a wave of announcements from U.S. companies looking to merge and relocate overseas.
On July 15, Treasury Secretary Jacob Lew wrote House Ways and Means Committee Chair Dave Camp, R-Mich., calling for Congress to enact retroactive legislation that would discourage companies from relocating overseas by tightening the anti-inversion rules in Section 7874. As many as eight major U.S. companies have recently announced deals that would see them merge with smaller companies overseas and use the transactions to reorganize as non-U.S. entities.
Enacted in 2004, Section 7874 generally prevents U.S. corporations from escaping treatment as a domestic entity after a merger with a foreign corporation unless more than 20% of the stock in the newly merged entity is held by the shareholders of the foreign company. The Obama administration has proposed increasing this threshold to 50% and creating tests to determine whether to continue to treat former U.S. companies as domestic entities if management, control and substantial business activities continued in the United States.
House Ways and Means Committee ranking minority member Sander Levin, D-Mich., and Sen. Carl Levin, D-Mich., have introduced the administration's proposal in Congress as the Stop Corporate Inversions Act of 2014 (H.R.4679, S. 2360). Both bills would be effective retroactively from May 8, 2014, but the Senate version would be effective for only two years, to give Congress more time to address the issue broadly as part of tax reform. In a July 24 speech in Los Angeles, President Obama raised the issue of inversions and called on Congress to support the legislation.
Senate Finance Committee Chair Ron Wyden, D-Ore., has pledged to address the issue but has resisted efforts to act on the issue outside of tax reform. His stance seemed to soften recently under pressure from the administration at a hearing he convened to discuss the issue. He has indicated the committee may seek to mark up standalone legislation after the August recess.
Any legislation is likely to get strong resistance from Republicans. Camp hasn't wavered in his opposition to addressing the issue outside of tax reform, but Senate Finance Committee ranking member Orrin Hatch, R-Utah, expressed openness to a standalone measure under strict restrictions. Hatch was deeply critical of the administration's response, but said he could consider acting on legislation outside of tax reform as long as it was revenue neutral and not retroactive.
It may be difficult to find room for any compromise, and no legislation appears imminent. Wyden has offered support for tightening the Section 7874 rules and has specifically called for their retroactive application. Sen. Chuck Schumer, D-N.Y., said at the hearing last week that he will write legislation to limit interest deductions and prevent earnings stripping along the lines of a provision in the administration's latest budget. The administration's proposal would generally limit interest deductions for certain members of a group that files a consolidated financial statement.
In addition, Democrats tried to advance a bill last week that would create a new 20% general business credit for expenses in connection with "insourcing" a trade or business from overseas and deny deductions for expenses for "offshoring transactions." The proposal has been included in the president's budget for several years and doesn't directly address inversions, but Democrats sought to draw parallels between the issues. The proposal is unpopular with Republicans and was defeated.
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