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May 9, 2014
Levin Brothers to Introduce Obama-Inspired Anti-Inversion Bill
by Luca Gattoni-Celli and Lindsey McPherson

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Two senior Democratic lawmakers are preparing legislation that will closely follow the Obama administration's plan to disallow for tax purposes corporate inversions under which the U.S. subsidiary is larger than the foreign parent company.
House Ways and Means Committee ranking minority member Sander M. Levin, D-Mich., told reporters May 8 that he and his brother, Sen. Carl Levin, D-Mich., hope to finalize a bill in the next few days. "There has been some draft legislation but we're doing further work on it," he said, adding that the final product will be introduced as companion legislation in the House and Senate.

Senate Finance Committee Chair Ron Wyden, D-Ore., also told reporters he is planning to lay out short-term steps to address inversions. Lawmakers should take those steps before addressing the practice as a part of tax reform, he said. Wyden declined to elaborate further.

The legislators' attention to inversions coincides with Pfizer Inc.'s recent announcement that it is pursuing a merger with AstraZeneca PLC and will base the resulting holding company in the United Kingdom. House Ways and Means Committee Chair Dave Camp, R-Mich., said April 29 that the decision to relocate the new company outside the United States was motivated by high corporate tax rates and signifies a need for tax reform.

Rep. Levin said there had been concerns about inversions long before reports of the Pfizer merger.

The Levins' bill would create rules to restrict companies from using inversion as a tax evasion strategy, Rep. Levin said. The objective is to distinguish between companies seeking to avoid paying U.S. taxes versus those that have a legitimate economic reason for inverting, he added.

A House Democratic aide said the bill would resemble a provision in President Obama's fiscal 2015 budget proposal that would limit the ability of domestic entities to expatriate by broadening the definition of an inversion transaction under section 7874. The Obama plan would replace the 80 percent test -- by which a corporation is deemed domestic for tax purposes if 80 percent of its ownership remains U.S.-based after an inversion -- with a greater-than-50-percent test, and would eliminate the 60 percent test that applies some adverse tax consequences to inverted corporations with more than 60 percent but less than 80 percent U.S. ownership.

Obama also proposed adding a special rule in which, regardless of the level of shareholder continuity, an inversion transaction will occur if the affiliated group that includes the foreign corporation has substantial business activities in the United States and the foreign corporation is primarily managed and controlled in the United States.

Sen. Levin, who has focused on corporate tax avoidance practices as chair of the Senate Homeland Security and Governmental Affairs Permanent Subcommittee on Investigations, told Tax Analysts that he and Wyden have discussed the inversion issue. "A loophole in our tax laws allowing these inversions threatens to devastate federal tax receipts," Sen. Levin said in a May 8 statement. "I am talking to my colleagues about legislation to close the loophole, which I intend to introduce soon."

Senate taxwriter Chuck Grassley, R-Iowa, said inversions should not be allowed if they lack a business justification beyond tax advantages. Grassley cited his previous work on the issue, which included the Reversing the Expatriation of Profits Offshore Act, introduced in 2002. That measure would have treated some inverted corporations as U.S.-based for tax purposes.

Republicans from both chambers said tax reform would be the best means of solving the problem of inversions. "I don't think this is something you can kind of one-off," Camp told reporters.

Camp said he prefers dealing with the inversion issue as part of a comprehensive tax reform effort that would create jobs and grow the economy, citing his tax reform discussion draft as an example. "We reformed the international tax system, which creates an incentive for employers to keep their intellectual property and their business in the United States," he said.

Finance Committee ranking minority member Orrin G. Hatch, R-Utah, also said the inversion problem should be fixed as part of tax reform. Speaking on the Senate floor, Hatch said he believes lowering the corporate tax rate and making the United States a more desirable location for companies to headquarter is a better strategy than attempting to make it more difficult for a U.S. corporation to invert.

Some of the anti-inversion proposals other lawmakers have discussed would only add to the U.S. tax system's unfavorable treatment of domestic companies versus foreign corporations, Hatch said. "I don't know when my liberal friends will catch on and realize that some of their proposals are downright idiotic," he added. "Instead of imposing inversion restrictions retroactively we should first keep our focus on where we can agree. By uniting around the goal to create an internationally competitive tax code, we can keep American job creators from looking to leave in the first place."

Senate taxwriter John Cornyn, R-Texas, was similarly blunt: "We need to just suck it up and do tax reform. It's killing jobs and the economy and the inaction on that is really embarrassing."

Sen. John McCain, R-Ariz., ranking minority member of the Permanent Subcommittee on Investigations, said he was looking at the Levins' bill and called inversions an "injustice." But McCain questioned whether the right response was "making the [U.S.] corporate tax compatible with the rest of the world [or] this particular rifle shot."

Asked if his legislation is something that could move outside of a larger tax reform effort, Rep. Levin said, "I think we need to. I don't think everything can wait for tax reform."

Meg Shreve contributed to this article.

Follow Luca Gattoni-Celli (@TheGattoniCelli) and Lindsey McPherson (@lindsemcpherson) on Twitter for real-time updates.

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