With pressure growing for the United States Congress to move forward on legislation
to halt the flow of "corporate inversions" in the short-term, the
Fair Federal Contracts Act has been introduced in both the Senate and the House
of Representatives, to add a provision to prohibit federal contracts going to
corporations that reincorporate overseas.
Corporate inversions have been used by US companies when bidding for (generally
smaller) foreign companies, as a means of moving away from the high American
35 percent corporate tax rate.
Under current law, a company that merges with an offshore counterpart can move
its headquarters abroad (even though management and operations may remain in
the US), and take advantage of the lower corporate tax rates in foreign jurisdictions
as long as at least 20 percent of its shares are held by the foreign company's
shareholders after the merger.
While accepting that rate-reducing corporate tax reform and a more internationally
competitive tax code would be longer-term solutions, Democrat lawmakers have
joined recently to propose legislation that would restrict corporate inversions
Two companion bills introduced by Sander Levin (D – Michigan), the House
Ways and Means Committee Ranking Member, and his brother, Chairman of the Senate
Permanent Subcommittee on Investigations Carl Levin (D – Michigan), would
attempt to curtail inversions by putting the minimum foreign shareholding at
50 percent. The provision would also be retrospective and apply to inversions
occurring after May 8, 2014 (when the change was first talked of in the Senate).
The Fair Federal Contracts Act would retain the stipulation that American shareholders
of the old US corporation should own at least 50 percent, but would also ban
federal agencies from awarding contracts to companies that reincorporate overseas
and "do not have substantial business opportunities in the foreign country
in which they are incorporating."
The bill has been introduced by Democrats in both the Senate – Dick Durbin,
the Assistant Majority Leader, and Carl Levin – and in the House –
Rosa DeLauro (D – Connecticut) , co-chair of the Democrat's Steering
and Policy Committee, and Lloyd Doggett (D – Texas), who serves on the
Ways and Means and Budget Committees.
"With every successful inversion, the tax burden increases on the rest
of us to pay what the corporate inverter doesn't," said Durbin. "The
burden is made worse by allowing companies to profit off of federal contracts
paid for by US taxpayers, while those very companies run from their US tax responsibility.
We should make permanent the long-standing ban on federal contracts for corporations
that have renounced their American corporate citizenship."
"For too long we have let companies avoid their tax obligations at the
expense of companies who pay their fair share," DeLauro added. "Even
worse, the federal government has been subsidizing this bad behavior, by continuing
to reward inverted companies with lucrative federal contracts. These companies
take advantage of our education system, our research and development incentives,
our skilled workforce, and our infrastructure, all supported by US taxpayers,
to build their businesses. But when the tax bill comes due, they hide overseas."
It is seen as unlikely that these Democrat proposals will move forward in Congress
any time soon, given that the Republican Party has generally been against any
short-term solution, and has insisted that the corporate inversion problem should
be dealt with only within a comprehensive tax reform solution.
For example, while Senate Finance Committee Ranking Member Orrin Hatch (R-Utah)
has hinted that "there may be steps that Congress can take to at least
partially address this issue in the interim," he has also warned that the
current legislative proposals, "rather than incentivizing American companies
to remain in the US, would build walls around US corporations in order to keep
them from inverting," and could have unintended consequences.
He has concluded that "whatever approach we take should not be retroactive
or punitive. And, it should be revenue neutral. … Most importantly, it
should not impede our overall progress toward comprehensive tax reform."