(Bloomberg) Legislation to deter U.S. companies from moving their addresses overseas should avoid retroactive taxes, prevent a net tax increase and move toward a revamp of the tax code, Senator Orrin Hatch of Utah said today.
The comments by Hatch, the top Republican on the Senate Finance Committee, offered a slim prospect that Congress might find a path to a bipartisan agreement addressing the growing number of corporate inversion deals.
“Whatever approach we take, it should not be retroactive or punitive,” Hatch said at a hearing today on international taxes. “If we actually want to accomplish something on this issue, we’re going to have to work together.”
Hatch’s opposition to a retroactive bill benefits the eight U.S. companies with pending deals to purchase foreign businesses, change addresses and reduce U.S. taxes. Democrats, including Finance Chairman Ron Wyden of Oregon, support legislation retroactive to May that would make it impossible for U.S. companies to escape the country’s tax system by purchasing smaller foreign businesses.
“The inversion virus now seems to be multiplying every few days,” Wyden said today. “The time for action is now.”
Wyden said after the hearing that he didn’t want to negotiate in public and that he and the committee were exploring a “variety of possibilities.”
He wouldn’t answer directly when asked whether the Finance panel may act before Congress is set to leave Washington in early August for a month-long break.
AbbVie and Medtronic
The eight companies are: AbbVie Inc., Medtronic Inc., Mylan Inc., Auxilium Pharmaceuticals Inc., Chiquita Brands International Inc., Horizon Pharma Inc., Applied Materials Inc. and Salix Pharmaceuticals Ltd. Wyden said the committee invited chief executives from inverted companies to testify; none would.
Under the Democratic plan, their deals would be unwound, renegotiated or penalized.
The Treasury Department is “aware of many more inversions in the works right now” that are part of a race to the bottom on corporate taxes, said Robert Stack, deputy assistant secretary for international tax affairs.
Hatch’s willingness to consider a near-term bill sets him apart from other Republicans on the issue. Still, his conditions put a significant amount of distance between him and Democrats and show the hurdles to any inversion-related legislation in a congressional election year.
Democratic Push
The Democratic push, aided by the White House, has run into resistance from Republicans including Hatch, who call the plan punitive and porous. Republicans control the U.S. House and can block legislation in the Senate. Because the Treasury Department has said it has no more regulatory authority, Republicans can block any action.
Most Republicans have insisted that any action occur only in the context of broader changes to the U.S. tax code that are unlikely until at least 2015.
The main Senate Democratic bill, from Carl Levin of Michigan, would impose limits for two years and raise $791 million. The House Democratic version and President Barack Obama’s budget each raise at least $17 billion over a decade.
Senator Charles Schumer, a New York Democrat, said he supports Levin’s two-year bill though he has concerns about a portion that would apply domestic tax rules to companies that are managed and controlled in the U.S.
Interest Deductions
Schumer, who said he also may offer his own bill, said the U.S. should focus on inverted companies’ ability to take interest deductions and reduce their U.S. taxes even after the inversion.
Wyden didn’t offer an opinion on Schumer’s proposed limits on interest deductions.
“If we wait for tax reform,” Schumer said, “we’re going to have lots more inversions and it’s going to take far too long if we ever get to tax reform at all.”
The Democratic plan would stop inversions—and make U.S. companies attractive takeover targets, Hatch said.
“The result is the same: continued stripping of the U.S. tax base,” he said.
Levin, Wyden and the administration all support a retroactive bill. Wyden is attempting to hold onto the May 8 marker he set that day in a Wall Street Journal opinion article.
Hatch wants any legislation to move the U.S. toward what’s known as a territorial tax system like those in the U.K. and Japan. Under that approach, U.S. companies would owe little or no taxes on income they earn outside the country.
Worldwide Income
Democrats are split on that broader question, though many want to toughen the current system, under which U.S. companies owe taxes on their worldwide income and can defer paying U.S. tax until they repatriate their profits.
Stack said it was “especially disconcerting” that inverted companies can take advantage of rules that allow them to take interest deductions in the U.S., effectively shifting their taxable income out of the country.
“We think these are all urgent needs that would protect our base even before we do tax reform,” Stack said.
Senator Charles Grassley, an Iowa Republican who helped write 2004 limits on inversions, distinguished between those and the current round of transactions, which he said are “substantive.”
The Senate bill is S. 2360. The House bill is H.R. 4679.
