We retired Tax Justice Blog in April 2017. For new content on issues related to tax justice, go to www.justtaxesblog.org
It’s bad enough when an American corporation reincorporates as a foreign company to avoid U.S. taxes even as it benefits from research, education, highways, courts and everything else those taxes pay for. But it’s even worse when these companies are allowed to contract with the federal government and profit from business funded by the American taxpayers.
This is the argument behind the No Federal Contracts for Corporate Deserters Act, a bill introduced in the House and Senate on July 29 to bar corporations that invert (reincorporate as foreign companies) from getting federal procurement contracts.
Corporate inversions have been happening for decades, and Congress has enacted laws that are supposed to prevent corporations from dodging taxes by inverting and prevent inverted companies from getting federal contracts. Those rules were never entirely effective, and companies such as Ingersoll-Rand, which reincorporated in Bermuda before those laws were passed, have found numerous ways to get federal contracts through grandfathering and other loopholes and are doing a billion dollars worth of business each year with the federal government.
But the recent wave of announced inversions is a much bigger problem. Corporations have figured out how to circumvent the rules entirely, adding the slightest sheen of legitimacy to the arrangement by obtaining a smaller foreign company and then claiming that the newly merged, restructured company is based in the foreign country.
This is why the medical device maker Medtronic and the pharmaceutical company AbbVie have recently announced plans to acquire Irish companies and reincorporate in Ireland. Similar moves are being considered by Walgreens and (once again) Pfizer.
In May, several lawmakers introduced the Stop Corporate Inversions Act to strengthen the anti-inversion provisions in the tax rules. The No Federal Contracts for Corporate Deserters Act would update the contractor rules the same way. In other words, the two bills are different ways of addressing the current explosion of companies seeking to invert, providing lawmakers separate opportunities to act.
Under the existing rules, a merger with a foreign company can change almost nothing about the American business and yet it can claim to be a new, restructured entity based offshore, with no adverse consequences. The newly merged company can be managed in the U.S. and have significant business in the U.S., and up to 80 percent of its stock can be owned by the shareholders of the original American corporation — and yet it will be considered a brand new company based offshore for tax purposes, not subject to any bar on federal contracting.
Under the two new bills, this would be impossible unless the newly merged company really does become foreign-owned, meaning less than 50 percent of its stock is owned by the shareholders of the American company, and it is actually managed in the foreign country. That would mean an American corporation could no longer simply buy a smaller offshore company and then fill out some paperwork to create the fiction of being foreign.
As more and more corporations announce plans to invert, Congress is under increasing pressure to act to stop them. But key lawmakers, like Senator Orrin Hatch, the ranking Republican on the Senate Finance Committee, have laid out conditions that make it extremely difficult to imagine how progress will be made during this Congress.