Tax Analysts Blog

Corporate Expatriations: More Deals Are Likely

Posted on Jun 2, 2014

In a May 8 Wall Street Journal op-ed, the Senate's top taxwriter said action would be taken against U.S. businesses that planned to change their legal residence by merging with foreign companies. Finance Committee Chair Ron Wyden, said that any such inversion transaction taking place on or after May 8 would be the target of future legislation. By this explicit pronouncement of an effective date, Wyden's intention was "in effect freezing the linebackers" -- that is, hoping to stop prospective deals with the threat of future retroactive legislation.

On May 20 Rep. Sander M. Levin in the House and Carl Levin in the Senate introduced anti-inversion legislation using the May 8 effective date suggested by Wyden. These bills, similar to a proposal made by President Obama in his budget, would tighten the rules Congress enacted in 2004 to stop of a wave of inversions that reached its peak in 2002.

Surprisingly, given his strong initial stance, Wyden didn't endorse or cosponsor the legislation introduced by the Levin brothers.

There are two responses to inversions. The first, as embodied in the Levin bills, is to impose tax penalties on firms that invert. The second is to adopt broad-based corporate tax reform that reduces tax disadvantages for firms that retain their legal residence in the United States.

Aligning himself with the views of Republicans, none of whom support the Levin bills, Wyden said on May 21 that he favors dealing with inversions only as part of a broad-based tax reform.

The problem with this approach is that, as everyone inside the Beltway knows, the chances that tax reform can be enacted even before 2017 are extremely slim.

Meanwhile, the parade of inversion deals will continue to march on.

The table below shows 13 deals that have taken place since 2010, and seven more that are known to be in the works. It is unlikely that any known or yet-to-be-made-public deals will be slowed by Democrats’ efforts. That's because dealmakers don’t feel threatened by the May 8 effective date. Here are three reasons why:

(1) History. In 2002, amid a loud public outcry about disloyal American companies abandoning the homeland, Senate taxwriters introduced anti-inversion legislation with a March 21, 2002, effective date. But these same senators later supported a March 5, 2003, effective date, and that is the date Congress ultimately adopted in its final 2004 legislation. Given that legislators didn’t stick to their effective date then, when the demand for tough anti-inversion rules was far greater than it is now, it is hard to imagine the effective date in this newly introduced legislation remaining intact through what is likely to be more years of congressional wrangling on the topic.

(2) Bipartisan support lacking. Back in 2002-2004, there was broad bipartisan support for targeted anti-inversion legislation. Most notably, then-Senate Finance Committee Chair Chuck Grassley declared inversions "immoral." Currently, only Democrats support targeted anti-inversion legislation, and there is no possibility of enactment without Republican support. If and when tougher anti-inversion rules are enacted, Republicans will feel no compulsion to honor an effective date they never condoned.

(3) Hatch statement against retroactivity. Sen. Orrin G. Hatch, who is now the lead Republican on the Senate Finance Committee, will become chair if, as seems probable, the Republicans retake the Senate after the November election. Unlike his Republican predecessor Grassley in 2002, Hatch opposes targeted legislation. Moreover, in a Senate floor speech he strongly criticized retroactive legislation generally and expressed his dislike of the retroactive date proposed by Wyden: "Retroactive changes to the law – the kind envisioned by my colleague’s op-ed – are the antithesis of stability and predictability," Hatch said on May 13.

A quick online review of the seven pending deals listed above gives no indication that either Wyden's statement on May 8 or the bills introduced on May 20 were stopping or even slowing these deals.

“So far, we have not seen the Levin bill have any chilling effect on transactions in the pipeline,” said Linda Swartz, leader of the tax group at Cadwalader, Wickersham & Taft, in a May 27 article by Bloomberg's Richard Rubin “The May 8 effective date is unlikely to hold.” Also in the same article, Robert Profusek, head of mergers and acquisitions at Jones Day in New York, reported: “We’re working on a lot of deals that have this element to it . . . . Nobody’s said, ‘Stop the music.’”

There is no doubt that in the long run, a proper tax reform would be far better than the Band-Aid approach of targeted anti-inversion legislation. But the problem is that the pace of tax-motivated cross-border deal-making is likely to move much more quickly than our gridlocked Congress can ever move on tax reform.

What then, Mr. Wyden and Mr. Hatch?

Read Comments (2)

edmund dantesJun 2, 2014

The USA is the richest country in the world. We have a moral duty to
redistribute that wealth to poorer countries around the world. But wealth is
not mere money, wealth is manufacturing know-how, wealth is jobs, wealth
includes corporations themselves. By keeping complex, unfair corporate
taxation in place, with the highest tax rates in the world, we are merely
encouraging profitable American companies to "self-deport" and thereby make the
globe a more equitable place.

That is the underlying Democratic policy, right? It must be, because it is
working very well. So let's drop the crocodile tears about inversions. If we
want to stop them, we know how to do it, and ever more onerous taxation is not
the answer.

Michael KarlinJun 3, 2014

Did I miss something? Are foreign companies no longer to be permitted to buy
U.S. companies or their assets? And are we going to see Germany decide to treat
a U.S. company as German if they buy a German company?

Expatriation rules are basically a form of protectionism. I don't have any
objection to requiring U.S. source income to be properly classified as such and
taxed by the United States, but why should a U.S. company with a large
percentage of its operations abroad be trapped in the United States so that we
can preserve the right to tax its non-U.S. income, if some foreign person wants
to buy those operations?

Wyden and the Republicans are right on this. We have an uncompetitive and
crushingly complex system of corporate taxation. No wonder people want to
escape. It doesn't have to be a race to the bottom, but when U.K. rates are
20% and U.S. rates are 40% or more, when you include state taxes, something has
to got to give. Flailing at would-be escapees with buggy whips is the wrong
way to go.

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