Outsourcing Bill Clears Hurdle, Long-Term Prospects Dim

By Aaron E. Lorenzo  

July 23 — The Senate advanced legislation July 23 that supporters say would boost U.S. jobs, although its long-term prospects appear less certain.

Democratic backers said the bill would play a part in slowing tax-driven corporate mergers called inversions, but Republicans said that is the wrong approach. The two sides are also at odds over other legislation more directly targeted at inversions.

“If corporations want to leave America, it's their right, but American taxpayers shouldn't be forced to foot the bill when U.S. corporations want all the benefits of commerce in this country without having to pay their fair share,” Senate Majority Leader Harry Reid (D-Nev.) said.

Speaking on the Senate floor, he said fixing the inversion problem would encourage U.S. companies to pay the taxes they owe, as would the legislation (S. 2569) that progressed 93-7 in an initial procedural vote. The bill, from Sens. John Walsh (D-Mont.) and Debbie Stabenow (D-Mich.), would provide a 20 percent tax credit for companies' expenses tied to bringing back domestic jobs and prevent others from deducting the cost of outsourcing U.S. operations.

It needed at least 60 votes to move forward on a motion to proceed before facing another technical hurdle known as cloture, which also has a 60-vote threshold. President Barack Obama would sign it into law if it passes, according to a White House statement of administration policy in support of the legislation.

Political Ploy

Republican detractors called the bill a political ploy and signaled they might not let the measure move any further because they don't think Reid will let them add amendments.

Sen. Orrin Hatch (R-Utah) told Bloomberg BNA that Reid is treading down the wrong path in trying to tie the outsourcing bill to inversions. Reid is also wrong to support legislation (S. 2360) from Sen. Carl Levin (D-Mich.) that would increase foreign ownership requirements for two years retroactive to May, Hatch said.

“We all know that if we reduce our corporate tax rate to 25 percent, that would solve the problem,” Hatch said.

A Joint Committee on Taxation estimate said the Walsh bill would reduce federal revenue by $214 million between 2014 and 2024.

Hatch said he expects Republicans to try to offer a number of amendments, possibly including language to eliminate the excise tax on medical devices. Sen. John Thune (R-S.D.) told reporters that another amendment could be offered to make permanent expensing under Section 179 of the tax code, language that has already passed the House.

But Hatch was skeptical Reid will allow any amendments at all.

Treasury Has Deterrence Authority

Others have called for the Treasury Department to use immediate stopgap regulations to make corporate inversions less lucrative.

The administration can unilaterally limit inverted companies from taking interest deductions in the U.S. or from accessing their foreign cash without paying U.S. taxes, said Stephen Shay, the Treasury's former top international tax lawyer, in an interview.

“If you take away the incentives, a large portion of these deals would not happen because they are indeed tax-motivated,” said Shay, who left the Obama administration in 2011 and is now a professor at Harvard Law School.

Companies including Medtronic Inc. and AbbVie Inc. have pending inversion transactions in which they would purchase a smaller foreign company and then move the combined corporation's legal address outside the U.S. In most cases, companies barely change their operations and don't move their executives.

Shay said he would limit companies from accessing foreign earnings that haven't been repatriated and taxed by the U.S.

Medtronic, for example, which is merging with Covidien Plc, plans to use a loan of its offshore earnings to finance the deal.

Shay said Congress gave the Treasury Department the authority under tax code Section 385 to reclassify debt as equity, transforming a deductible interest payment into a nondeductible dividend.

Similar ideas are seen in proposals offered by the Obama administration and House Ways and Means Committee Chairman Dave Camp's (R-Mich.) tax overhaul proposals that target excess domestic debt for U.S. members of a worldwide affiliated group, and it is possible to implement those changes through regulations, Shay said.

With assistance from Marc Heller in Washington

To contact the reporter on this story: Aaron E. Lorenzo in Washington at aaron@bna.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bna.com