United States: Washington Update: Pressure Mounts On Lawmakers And The Treasury As More Inversion Deals Announced

Last Updated: September 26 2014
Article by Grant Thornton

Lawmakers have just a few legislative days remaining before they break again for the final stretch of campaigning ahead of the November midterm elections. That leaves little time to address one of the the hottest issues of the summer, tax inversions. Although legislators from both parties agree on the need to stem such transactions, which ultimately result in an erosion of the U.S. tax base, they have yet to agree on how to do so.

A look back at inversions

The issue of tax inversions – whereby a U.S. corporation is replaced by a foreign corporation as the parent company of a worldwide affiliated group of companies – has been a thorn in the side of lawmakers for years. Such transactions in effect allow a U.S. company to move its tax home to a lower-tax jurisdiction. In 2004, Congress enacted Section 7874, which was designed to prevent such transactions.Under Section 7874, if certain conditions are met, a foreign acquiring corporation will be treated as a U.S. domestic corporation.

The present dilemma

Recently, the debate over whether this law has been effective enough in deterring the practice has ratcheted up, especially after American pharmaceutical giant Pfizer Inc. announced in April that it would invert with AstraZeneca PLC and establish a new tax home in the United Kingdom. While that deal eventually fell apart, other U.S. companies, like AbbVie Inc., Chiquita Brands International Inc., and Medtronic Inc., among others, have announced similar deals.

To many members of Congress, the enactment of Section 7874, while a bipartisan effort, reflects a systematic problem with the U.S. tax code, namely that short-term patches have taken precedence over long-term, holistic changes. Although Congress is nearly unanimous in its desire to fundamentally reform the tax code, an equal desire not to further increase the deficit has made progress on such reform difficult. In dealing with the immediate threat brought on by the most recent wave of inversions, the same issue of short-term fixes versus long-term reform remains a key area of contention.

Some Democrats, including Senate Finance Committee Chairman Ron Wyden (D-OR), have supported standalone measures that would strengthen the anti-inversion rules of Section 7874 retroactively from May of this year. His counterpart on the Finance Committee, Ranking Minority Member Orrin Hatch (R-UT), has also expressed openness to enact legislation on inversions outside of comprehensive tax reform. Hatch, however, has said he will only consider legislation that is revenue neutral and not punitive or retroactive.

Hatch's willingness to support such standalone legislation is at odds with many in the Republican Party. Outgoing House Ways and Means Committee chair Dave Camp (R-MI) and Speaker John Boehner (R-OH) have each suggested addressing inversions as a part of comprehensive tax reform. Paul Ryan (R-WI), Camp's presumptive replacement should Republicans retain control of the House of Representatives, is said to agree with that approach.

Meanwhile, the Obama administration is exploring a move forward on its own, with Treasury Secretary Jack Lew announcing several weeks ago that the Treasury would explore options to curb the attractiveness of tax inversion transactions. On September 8, Lew said Treasury officials were reviewing a broad range of actions that could either limit companies' ability to engage in inversions or reduce the tax benefits after inversions take place, and that the Treasury would make a decision "in the very near future." Discussion of the Treasury's ability to move on its own ramped up after a former Treasury official wrote an article describing regulatory measures the administration could undertake without having to wait for a divided Congress to act.

Lew, however, also said that the best way to address inversions would be through tax reform, and that "only a change in law can shut the door, and only tax reform can solve the problems in our tax code that leads to inversions."

That approach is generally the consensus by many members of Congress, Wyden and Hatch included, but many of those members also recognize political reality: It is highly unlikely that Congress will enact comprehensive tax reform legislation in the current calendar year. The odds are similarly low for tax reform in 2015 or 2016, especially as attention is diverted to the presidential election. Those members believe anti-inversion legislation is too important to wait for comprehensive tax reform.

Potential solutions for preventing inversions

At this point, there are three options for Congress:

Option Generally Supported By Possible Outcome
Standalone Anti-Inversion Legislation Democrats; Finance Committee Ranking Member Orrin Hatch Stopgap measure could stem tide of inversion activity. More likely to be agreed upon than complicated comprehensive tax reform. But if it raises revenue and is punitive or retroactive, Hatch is unlikely to support.
Standalone Anti-Inversion Legislation but with tie-in to Tax Reform Some members of both parties Recognizes difficulty of tax reform and takes practical step of acting on specific, short-term goal, but also considers the root of the problem. However, such tie-ins are not always well crafted, and many members would want any revenue raised to count toward future tax reform legislation.
Anti-Inversion Legislation only with Comprehensive Tax Reform Most Republicans, some Democrats Both sides have suggested fundamental tax reform is the best opportunity to dramatically reshape expatriation incentives for businesses. But this is highly unlikely in the near term.

Other Legislative Proposals

  • President Obama's FY15 Budget proposal: Broaden definition of inversion transaction by reducing 80 percent test to a greater than 50 percent test, eliminating the 60 percent test. Regardless of shareholder continuity, an inversion transaction would be deemed to have occurred if the combined entity has substantial business activities in the U.S. and the foreign corporation is primarily managed and controlled in the U.S.(Proposal by President Obama, FY2015 budget)
  • Stop Corporate Inversions Act of 2014 (H.R. 4679): Proposed by Rep. Sander Levin (D-MI), this bill proposes the same general changes outlinedin President Obama's FY15 Budget, but would be retroactive to May 8, 2014.
  • Stop Corporate Inversions Act of 2014 (S. 2360): Proposed by Senator Carl Levin (D-MI), this is the Senate companion bill of H.R. 4679., It would enact the same changes but sunset after two years.
  • Strengthen earnings-stripping rules under Section 163(j): Proposed by Senator Chuck Schumer (D-NY), this proposal would repeal the debt-equity safe harbor provision and reduce the ratio by which related party interest paid can exceed taxable income before it is considered nondeductible from 1.5:1 to 1.25:1.


Congressional leadership, as well as the taxwriters in both parties, would prefer to see anti-inversion legislation to be a part of comprehensive tax reform. In the latest Grant Thornton International Business Report (IBR)1, a majority of the 2,500 senior executives surveyed have called for "updated tax rules for a modern, digital economy and the harmonization of global corporation tax rates."

Francesca Lagerberg, global leader for tax services at GTI, said, "International tax standards clearly need to be stripped down and rebuilt for the world we live in today. The existing legislation is no longer fit for purpose in an increasingly interconnected, digital world in which the definition of a 'border' is archaic and next to meaningless."

However, there is a sense that such reform is unlikely in the near-term, at-least in the U.S. Recognizing this, Democrats want to pursue standalone legislation outside of tax reform to stem the tide of the most recent wave of tax inversions. Republicans, however, are wary of such an approach, warning that piecemeal approaches do not solve the larger problem of tax base erosion and expatriation by U.S. companies.

The Treasury has broad authority to implement regulations, but that authority does have its legal and practical limits. While no specifics have been announced by the Obama administration, it remains to be seen how effective the measures developed by the Treasury, if any, have on making tax inversions less attractive.

At the same time, as more attention is heaped on such transactions, companies may rethink the strategy altogether, so as to avoid poor publicity or an intensive scrutiny of their transaction. Walgreen Co.'s acquisition of Alliance Boots GmbH was restructured so that Walgreens would not re-domicile outside the U.S.Burger King Worldwide Inc.'s merger with Tim Hortons Inc. was almost immediately announced by the companies as having non tax-related reasons for merging. Finally, Valeant Pharmaceuticals International Inc. announced in a securities filing that the IRS was examining the company's consolidated group for the years immediately following its inversion and re-domiciliation in Canada.

"It is important to remember that like many issues facing Congress, things can change quickly," said National Managing Principal of Public Policy Mary Moore Hamrick. "Grant Thornton is committed to advancing tax reform to nurture growth, create certainty and reduce complexity, and we will be monitoring this issue closely."

As the issue of tax inversion develops, so too will this document. Check back for more updates soon. For additional information about tax inversions, potential legislation or other tax issues, contact the Washington National Tax Office or Public Policy group.


1. The Grant Thornton International Business Report (IBR) is a survey of 2,500 senior executives in 34 economies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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