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Multinationals Warn Against US Inversion Quick Fixes

by Mike Godfrey, Tax-News.com, Washington Tuesday, August 12, 2014

The current policy debate on so-called corporate inversions threatens to inadvertently impact all American subsidiaries of foreign multinationals and make the country less attractive for future foreign direct investment (FDI), according to a letter written by the Organization for International Investment (OFII).

Representing the US operations of many of the world's leading multinationals, OFII wrote a letter on August 5 to the Chairman and Ranking Member of the Senate Finance Committee, which confirmed that "talk of cracking down on US corporations that move offshore is making some other companies nervous, notably foreign-owned concerns, which are warning of cuts to their US employment or investment if they're caught in the crosshairs."

OFII pointed out that US subsidiaries employ 5.6m Americans, or 17 percent of US manufacturing jobs. With a combined annual payroll of USD438bn, these companies provide well-paying jobs at levels substantially higher than the economy-wide average. Additionally, US subsidiaries pay approximately 16 percent of total US corporate income taxes – even though these companies make up less than one percent of all American businesses with payrolls.

Nancy McLernon, OFII's president and CEO, noted that, "as President Obama has made clear, foreign direct investment is critical to economic growth, driving American manufacturing, innovation, exports, and job creation. Insourcing companies that have chosen to invest billions of dollars in local communities across America now find themselves inadvertently caught in Washington's 'inversion fix' crosshairs. The President and Congress need to ensure that global companies investing in the United States are not penalized for supporting American jobs."

Corporate inversions have been used by US companies when bidding for foreign companies as a means of moving away from America's 35 percent corporate tax rate. A company that merges with an offshore counterpart can move its headquarters abroad, and take advantage of the lower corporate tax rates in foreign jurisdictions if at least 20 percent of its shares are held by the foreign company's shareholders after the merger.

Legislative efforts in Congress have largely favored putting the minimum foreign shareholding requirement at 50 percent, while the preferred route for Republicans is generally to await agreement on comprehensive tax reform that would reduce the corporate tax rate and establish a more internationally competitive tax code. However, while Congress delays a legislative solution, it has been confirmed that the White House is looking at possible administrative actions that it could utilize, without the need for legislation, to reduce the tax benefits of inversions.

In the letter, OFII cautioned that both the legislative efforts in Congress and the potential regulatory action by the Obama Administration could inadvertently affect its members as well, and make the US less attractive for future FDI.

OFII is specifically concerned by the calls to tighten rules governing the deduction of interest expense, which it fears may not be limited to US companies that re-incorporate abroad through inversions, but instead impact all US subsidiaries with foreign ownership. Another proposal of concern is that management and control provisions could be included in a new definition of an inverted company.

In particular, OFII urged the Committee "to carefully consider the manner in which possible changes to the tax treatment of business debt will impact the US investment climate, particularly given the economic benefits of FDI. US subsidiaries are already subject to unique interest limitations under the Internal Revenue Code, intended to prevent base erosion through 'excess' interest expense. [For example, the Code] limits deductions of interest on loans from a foreign related party, such as a non-US parent company, even if the terms of the loan meet the arm's length standard."

Additionally, OFII strongly opposed the inclusion of management and control provisions in possible legislation. "These provisions, if enacted," it stated, "could essentially – and inappropriately so – introduce a subjective management and control test for corporate residence into US tax law, jeopardizing American jobs and undermining FDI."

It is concerned that, under the proposals, "if a foreign-parented group makes an acquisition of a US business – however small – such acquisition could cause the foreign parent of the group to be treated as a US corporation for tax purposes. This would capture foreign-based multinational companies that locate regional business units or business lines within the US, likely resulting in senior management personnel and business units moving outside the country."

In conclusion, OFII agreed that "the best way to ensure US competitiveness and encourage job-creating investment from all sources is through comprehensive tax reform. OFII is united with the broader business community in its support for a substantial reduction in the US federal corporate income tax rate and elimination of unnecessary complexity that will provide the certainty critical to long-term business planning."

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