How Inversions Leaped From the Shadows To Become Major Focus Inside Washington

By Ken Wells, Jonathan Allen and Richard Rubin

Jan. 14 — So how did the previously obscure term tax inversions become part of Washington parlance, fodder for the next presidential campaign and the issue that helped derail a Treasury Department nominee?

Thank, or blame—depending on your perspective—cutting-edge tax lawyers, populist Democrats, a banana seller, a drugmaker, a hamburger chain, the 35 percent U.S. corporate tax rate and a Wall Street banker named Antonio Weiss.

There is also the prospect that inversions could cost the Treasury up to $33.6 billion in lost revenue over the next decade, according to the congressional Joint Committee on Taxation.

Inversions are the name given to transactions in which U.S. multinational corporations shift their addresses abroad to more tax-friendly shores, often by merging with a smaller overseas company.

This is the story of how they have become a front-burner issue—all the more astonishing considering that little more than a year ago almost no one in Washington was paying attention to them.

Well, almost no one—except then-Sen. Max Baucus (D-Mont.). As chairman of the Finance Committee, Baucus delivered a speech on the Senate floor Oct. 30, 2013, less than two weeks after exhausted lawmakers had ended a government shutdown and staved off a default on the debt.

Tax Address

Its focus: the proposed inversion of Applied Materials Inc., a California semiconductor company that was planning to merge with a Japanese competitor and locate the combined company's tax address in the Netherlands. Baucus knew Applied Materials well. It maintains a research facility in Kalispell, Mont. Baucus was plenty familiar with inversions, too.

The senator, now the U.S. ambassador to China, had been the top Democrat on the Finance Committee since 2001 and had been involved in the most successful anti-inversion effort in Congress. In 2002, he joined with Sen. Charles E. Grassley (R-Iowa) to issue a stern warning to companies: Stop inversions now, because we're going to pass a retroactive law curbing them.

That worked, stemming the tide of so-called naked inversions in which companies used a paper transaction to move their tax address to Bermuda and the Cayman Islands, steeply cutting their U.S. tax bills. Their stance—and a public outcry—helped persuade companies such as Stanley Works not to make the move. The Baucus-Grassley law passed Congress in 2004, retroactive to March 2003.

Circumventing Law

As the Treasury Department plugged away on regulations, tax lawyers started coming up with clever ways to circumvent the 2004 law.

With Applied Materials' proposed inversion, Baucus was trying to ring the alarm bells. He noted that other U.S. companies that aren't household names yet big enough to matter—Eaton Corp. and Actavis Inc.—were also pursuing inversions, in both cases to Ireland and its 12.5 percent corporate tax rate.

As Treasury plugged away on regulations, tax lawyers started coming up with clever ways to circumvent the 2004 Baucus-Grassley law.

Baucus wasn't having much luck in Congress. Lawmakers—consumed by the financial crisis, the recession, the fiscal cliff and constant partisan clashes—just didn't have inversions on their radar screen. And, anyway, Baucus was aiming higher. He wanted legislation curbing inversions to be tied to a comprehensive revamp of the tax code that would give U.S. companies incentives to keep their addresses at home.

‘Easy' Attack

“It would be easy for us to attack these companies by calling them immoral and unpatriotic,” Baucus said in his speech on Applied Materials. He suggested that approach would be wrong—yet he would be previewing a line of criticism that President Barack Obama and his Treasury secretary would deploy a few months later.

Baucus, who in April 2013 announced he would retire from the Senate, had been working on tax-code changes with his House counterpart, Rep. Dave Camp (R-Mich.). Soon, though, Obama nominated Baucus to be ambassador to China and he left Congress before his term ended. Camp released a draft tax revamp plan in February 2014 that landed with a thud. It never came to a vote in Congress, not even in his committee.

In March, Obama in his annual budget plan included for the first time a proposal that would make it almost impossible for U.S. corporations to complete inversions by purchasing smaller foreign companies.

And then came two big announcements. Chiquita Brands International in March said it would move its tax address to Ireland. In late April, pharmaceutical giant Pfizer Inc. roared to the inversions forefront with a dramatic plan to acquire U.K.-based AstraZeneca Plc and become a U.K. company, potentially saving about $1 billion a year in U.S. taxes.

Democratic Involvement

Democrats in Congress started getting involved. On May 8, Sen. Ron Wyden (D-Ore.), who had replaced Baucus as chairman of the Finance Committee, tried to fire up the issue with an op-ed piece in The Wall Street Journal.

Citing the inversions completed in the past two years, Wyden wrote of the companies, “While they may not be breaking U.S. laws, many of these companies are navigating a loophole in America's broken and dysfunctional tax code. And while their shareholders may secure a temporary win, workers, taxpayers and this country all lose. America's tax base erodes at a cost of hundreds of millions of dollars in revenue, increasing the burden on other companies and individuals.”

More than a dozen inversions had been completed in the period he mentioned.

Curbing Breaks

Wyden, too, was playing the Baucus pragmatist. He wrote that curbing the breaks should be paired with a tax code overhaul cutting the corporate rate to 24 percent from 35 percent.

Still, he told reporters later that he wanted to send a message by warning that legislation was coming. The goal, he said, was “freezing the linebackers” so companies wouldn't act while they were uncertain what Congress would do.

They didn't freeze—the political environment was markedly different from 2002.

And unlike in 2002, when Baucus and Grassley had the backdrop of the Sept. 11 attacks and the Enron accounting scandal, Wyden was working against a dysfunctional Congress that couldn't even agree to stay open.

Next up were the Levin brothers from Michigan—Carl, a Democratic senator, and Sander, a Democratic House member. Now in their 80s and given to wearing rumpled suits, the brothers have made careers out of populist causes and tax wonkery. On inversions, both men quickly put their staffs to work.

Same Conclusion

In early May, not long after the Pfizer announcement, they independently came to the same conclusion—grab the Obama administration's budget proposal and turn it into legislation that would severely restrict inversions for companies that would keep at least 25 percent of sales, employees or assets in the U.S. post-deal.

Though the brothers are close and talk frequently, they didn't realize they were working on the same track until far along in the process, said a House Democratic aide. They ended up introducing almost identical bills. The main difference was timing—Sander Levin wanted the restrictions to be permanent.

Carl Levin had a temporary proposal that would give Congress two years to revise the tax code.

Some influential Republicans and business lobbying groups were taking a different view. Their case: Inversions symbolized a failure of the tax code, not the greed of U.S. corporations. Companies were merely doing what their tax lawyers said they could do under the arcane laws. Sen. Orrin G. Hatch (Utah), then the top Republican on the Finance Committee, made that point in a May 8 floor speech.

‘More Desirable.'

Rather than restrict inversions, a better solution would be to “make the United States a more desirable location to headquarter one's business,” he said. “I believe the latter is the better way.”

The U.S. Chamber of Commerce would later chime in with a similar notion: “We've got companies from one end of the coast to the other who are very concerned about the need to fundamentally make our tax code more competitive,” said the chamber's top lobbyist, R. Bruce Josten.

Inversions are a symptom, he added, of the U.S. refusing to revise corporate taxes while other developed countries are engaging in tax-cut competition that has left American firms at a disadvantage.

As the political jousting began to take shape and summer neared, inversions stayed in the headlines. Pfizer announced it had given up on the AstraZeneca inversion—only because the U.K. company rejected its offer. It was clear the company was still looking to invert.

Paying Attention

Others suddenly were paying attention—including aides to Obama. They were taken by surprise when name-brand U.S. companies began to invert. They saw it as a challenge and an opportunity, according to a former White House official involved in discussions about how to address the issue.

If Obama did nothing, the aides reasoned according to the former official, he could be blamed for letting companies shift their tax addresses overseas with impunity. Instead, they decided he should come out forcefully against inversions as a symbol of the wealthy benefiting from the U.S. tax system at the expense of everyone else. From a political perspective, it was a no-brainer for Obama, the former official said.

Inversion Announcements

In June and July came a fresh wave of high-profile announcements: Medtronic Inc., the medical-device maker, said it would buy Covidien Plc in a $43 billion deal and move its tax address to Ireland. Drugstore giant Walgreen Co. acknowledged that it was considering an inversion as part of its purchase of a British drugstore chain. Auxilium Pharmaceuticals Inc. said it planned to invert by buying a small Canadian company. Drugmaker AbbVie announced its inversion plan through a merger with Irish company Shire that would eclipse the size of the Medtronic deal.

Even American hamburger makers were heading out. Burger King Worldwide Inc., home of the Whopper, had agreed to buy Tim Hortons Inc. and move its tax address to Canada.

The Obama administration, which had been largely silent at least publicly on inversions since the president's budget plan was released in March, jumped back into the fray. In July, Treasury Secretary Jacob J. Lew penned a letter to Congress seeking urgent action to halt inversions.

Congress should enact legislation immediately “to shut down this abuse of our tax system,” Lew wrote in a letter to Camp, chairman of the House Ways and Means Committee. “What we need as a nation is a new sense of economic patriotism, where we all rise and fall together.”

Limited Options

Lew's position then was that Treasury had limited options on its own to halt the practice—a position he later modified as fellow Democrats stepped up their anti-inversion rhetoric.

In a July 24 speech, Obama stepped into the ring with a roundhouse punch. Companies gaming the tax code to undertake inversions were “corporate deserters who renounce their citizenship to shield profits,” he said.

The speech may have fired up the Democrats' populist base though it played poorly at the Chamber of Commerce, whose offices are just across Lafayette Square from the White House. Josten, the lobbyist, said the group warned Obama's economic aides that if they were going to demonize U.S. businesses, the chamber would start swinging too.

“We made some offline calls across the street suggesting that if the rhetoric continues” the chamber would be “very overtly and directly responding to it,” Josten said.

Within days both Lew and Obama had backed off the traitor talk—though it was clear that inversions had risen way up the political ladder.

Punishes Companies

The business lobby had its own counter-argument: Absent a revamp, the tax code not only unfairly punishes U.S. companies, it makes them vulnerable.

“The principal concern that we and our domestic companies have is that the longer this goes on, the greater likelihood you are going to see of foreign multinationals taking over U.S. multinationals,” Josten said in a November interview. “As long as we do nothing, the risk is more InBevs taking over more Budweisers.”

By August, Lew had decided that Treasury wasn't entirely powerless to act on inversions without Congress. Treasury officials, leaking word to the media, said they were looking at a wide range of options by which Lew could deter inversions using the existing tax code.

Though details were scarce, the message was clear. Corporations should be wary of proceeding with inversions because restrictions could be imposed retroactively—curbing benefits of many of the proposed deals. Lew said as much in a Sept. 9 interview on Bloomberg Television. Treasury, he insisted, can “take a lot of value out of these inversions.”

Treasury Rules

On Sept. 22, Treasury made good on its intentions, issuing a notice that it proposed to adopt rules that would, among other things, stiffen the tests for inversions. These included a prohibition on “hopscotch” loans that let companies access foreign cash without paying U.S. taxes, and imposed new curbs on actions that companies can use to make such transactions qualify for favorable tax treatment.

“This action will significantly diminish the ability of inverted companies to escape U.S. taxation,” Lew said on a conference call that day. “For some companies considering deals, today's action will mean that inversions no longer make economic sense.”

Some tax experts agreed. Edward Kleinbard, a tax law professor at the University of Southern California, told Bloomberg News that Treasury “has taken a very hard line on these transactions.” He cited the government's “very broad reading of its regulatory authority to address inversion deals involving accessing offshore cash” as well as “not grandfathering deals that are announced but not closed.”

‘Rabbit Hole.'

The move dismayed some Republicans, including Camp. “We've been down this rabbit hole before, and until the White House gets serious about tax reform, we are going to keep losing good companies and jobs to countries that have or are actively reforming their tax laws,” Camp said in a statement. “I fear this administration is only interested in doing the bare minimum—just enough to say they care.”

Still, Treasury's stated intention to act and its notice to change the rules appeared to have had the desired effect on some proposed deals. In August, Walgreen said it decided against pursuing its inversion. In September, so did Auxilium, choosing instead to be acquired by a foreign company. And AbbVie, specifically citing the new Treasury rules, canceled a planned inversion.

Cayman Islands

Congress didn't do much on the issue, though in July the House voted 221-200 to prevent companies moving from the U.S. to Bermuda or the Cayman Islands from winning some federal contracts—the first recorded vote by U.S. lawmakers attempting to curb the practice.

Still, the vote was largely symbolic. The measure, which passed the Senate and become law as part of a government funding bill, didn't affect most companies in the latest round of inversions as they planned to move their tax addresses to the U.K., Ireland and Switzerland.

On the Senate side, Charles E. Schumer (D-N.Y.) said he would pursue legislation against earnings stripping, a post-inversion technique that companies can use to shift profits out of the U.S.

And in reality, inversion fever may have been dying down—until Obama on Nov. 13 nominated Antonio Weiss for the post of undersecretary of domestic finance. In any other year, Weiss, a Lazard Ltd. investment banker with solid Democratic Party credentials, might have cruised through.

Weiss Nomination

Yet Weiss had a big “I” issue—as in inversions, having consulted on the Burger King deal and participated in arranging other inversions. He found himself at the center of an ideological fight within the Democratic Party over the finance industry's clout in Washington.

Democrats, led by Sen. Elizabeth Warren (Mass.), seized on Weiss's inversion history to lay out an argument that the Obama administration relies too much on Wall Street veterans to fill key regulatory posts. Warren was joined in opposition by Democratic Sens. Joe Manchin III (W.Va.), Jeanne Shaheen (N.H.) and Al Franken (Minn.).

Warren won. On Jan. 12, the White House said Weiss had asked them to withdraw the nomination because he didn't want to become a distraction. He instead accepted a lower-profile role as a counselor to Lew.

What is clear is that inversions aren't going away.

More Plans

More companies continue to announce plans to invert; the latest to do so include Civeo Corp., which runs camps for oil-field workers, and Wright Medical Group Inc., which makes screws to repair broken ankles. Undeterred by the new rules, Medtronic is on track to complete its shift to Ireland by the end of January.

The issue of inversions “won't go away easily” and is likely to keep cropping up, especially in today's more “populist” political era, said Douglas Holtz-Eakin, a former chief economist on President George W. Bush's Council of Economic Advisers who is now president of the American Action Forum policy group.

The only way to truly fix the problem, he said, is for Congress and the White House to pass a comprehensive corporate tax overhaul. Until then, inversions will remain a hot topic in Washington.

“This is bad for jobs and investment in the United States,” he said. “It may be good politics, but it is bad substantively. The real-world consequences continue to rise.”

 With assistance from Zachary R. Mider in New York and Robert Schmidt and Ian Katz in Washington.

To contact the reporters on this story: Ken Wells in New York at, Jonathan Allen in Washington at and Richard Rubin in Washington at

To contact the editor responsible for this story: Jodi Schneider at

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