Briefings

TAX POLICY: Senate Finance Hearing on Inversions

On Tuesday, July 22, 2014, the Senate Finance Committee held a hearing entitled “The U.S. Tax Code: Love It, Leave It or Reform It!” The panel of witnesses included officials from the U.S. Treasury Department and the Organisation for Economic Co-operation and Development (OECD), as well as members of academia, an economist with PricewaterhouseCoopers and a senior editor from Fortune.

CONGRESSIONAL HEARING REPORT


COMMITTEE: Senate Finance Committee

SUBJECT: “The U.S. Tax Code: Love It, Leave It or Reform It!”

DATE: July 22, 2014


Senate Finance Committee


Members Present:

Chairman Ron Wyden (D-OR)
Ranking Member Orrin Hatch (R-UT)
Sen. Charles Grassley (R-IA)
Sen. Sherrod Brown (D-OH)
Sen. Charles Schumer (D-NY)
Sen. Debbie Stabenow (D-MI)
Sen. Robert Portman (R-PA)
Sen. John Thune (R-SD)

Witnesses:

Mr. Robert B. Stack, Deputy Assistant Secretary for International Tax Affairs, U.S. Department of the Treasury

Mr. Pascal Saint-Amans, Director, Centre for Tax Policy and Administration, Organisation for Economic Co-operation and Development (OECD)

Dr. Mihir A. Desai, Mizuho Financial Group Professor of Finance & Professor of Law, Harvard University

Dr. Peter R. Merrill, Director, National Economics and Statistics Group, PricewaterhouseCoopers
Dr. Leslie Robinson, Associate Professor of Business Administration, Tuck School of Business, Dartmouth College

Mr. Allan Sloan, Senior Editor at Large, Fortune

Overview

On Tuesday, July 22, 2014, the Senate Finance Committee held a hearing entitled “The U.S. Tax Code: Love It, Leave It or Reform It!” The panel of witnesses included officials from the U.S. Treasury Department and the Organisation for Economic Co-operation and Development (OECD), as well as members of academia, an economist with PricewaterhouseCoopers and a senior editor from Fortune.

The hearing focused on the recent rise in U.S.-based multinational corporate “inversions,” in which a U.S. company reorganizes offshore after acquiring a foreign business based in a lower-tax jurisdiction. Lawmakers have been under increasing pressure in recent months with the announcement of several high-profile inversion deals, including last week's announcement from pharmaceutical company AbbVie Inc. that it was finalizing the largest inversion deal yet with its $55 billion purchase of U.K.-based Shire Plc.

The Obama administration called on Congress last week to pass legislation to discourage U.S. companies from inversion deals. Senate Finance Committee Chairman Ron Wyden has also vocally supported “plugging this hole” in the tax code. Ranking Member Orrin Hatch (R-UT) has towed a more cautious line, saying he is open to doing something to stem the inversion tide, so long as it is “not punitive or retroactive,” like the proposals offered thus far. Sen. Carl Levin (D-MI) has introduced legislation, S. 2360, that would apply retroactively and would make it significantly more difficult for U.S. companies to invert.

Although the hearing was preceded by heightened interest and calls for action, no new proposals were mentioned, and lawmakers gave no indication that legislative action would actually occur in the near future. In short, the hearing was more of a rehashing of the problem and the threat of erosion of the U.S. tax base rather than a discussion of viable solutions.

Chairman and Ranking Member Statements

Chairman Wyden set a decidedly “medical” theme for the hearing—a nod to the fact that the majority of the recent inversion deals have involved pharmaceutical companies as well as the medical device giant, Medtronic. Wyden described the current U.S. tax code as “infected with the chronic diseases of loopholes and inefficiency.” He went on to call the rise in corporate inversions as “the latest outbreak of this contagion.”

Wyden emphasized that he would prefer to treat the underlying cause of the inversion problem—the current U.S. corporate tax code—and move bipartisan, comprehensive tax reform forward. But, with no prospects for accomplishing tax reform in the near-term future, Wyden said he's become convinced that something must be done to stop this “feeding frenzy” of inversion deals.
Ranking Member Hatch took a more measured stance, stating his preference to address the issue through corporate tax reform that would significantly reduce the statutory corporate tax rate and change the international tax system to a more territorial regime.

However, he also indicated an openness to doing something in the interim, acknowledging that tax reform will clearly not happen this year.
 
“[W]hatever approach we take, it should not be retroactive or punitive. And, it should be revenue neutral. Our approach should move us towards, or at least not away from, a territorial tax system and should not enhance the bias to foreign acquisitions.”

Hatch also said that any interim fix aimed at clamping down inversions should not “impede our overall progress toward comprehensive tax reform,” and should therefore not be inconsistent with “our House colleagues' approach.”

Witness Testimony and Q&A

Robert Stack, the Treasury Department's Deputy Assistant Secretary for International Tax Affairs, highlighted the Obama administration's budget proposal to strengthen interest-stripping rules. Stack urged the committee to pass anti-inversion legislation immediately with a retroactive effective date of May 2014. In response to a question from Wyden, Stack said that the cost of waiting to address this problem would be “very high.”

The OECD's Pascal Saint-Amans stressed that these corporate inversions and erosion of the corporate tax base, in general, is a global problem—one that the OECD hopes to address with its first set of Base Erosion and Profit Shifting (BEPS) recommendations, due out this fall.

Dr. Mihir Desai, a Harvard professor of law and finance, said this wave of U.S. inversion deals highlight the increasing cost of maintaining a worldwide tax regime. He urged the committee to keep in mind that these transactions are nested in a larger set of corporate decisions and that any hastily passed anti-inversion legislation could have unintended consequences, such as increasing the number of foreign acquisitions of U.S. corporations.

Wyden asked Desai if Americans should be concerned, for example, about the prospect of Walgreens, “an American icon,” inverting (as it is rumored to be considering). Desai responded, “yes,” but added that what should be done about that concern is a different question.

Sen. Schumer came out strongly in favor of Levin's bill, S. 2360, which would place a two-year moratorium on most of the types of inversion deals we're seeing now. But even that is not enough, Schumer said. Schumer called for further limitations on the U.S. interest expense deduction to further deter inversions.

Sen. Portman expressed the most concern of the committee members about the “unintended consequences” that anti-inversion and anti-interest stripping legislation could bring. He warned that we could see “more and more foreign acquisitions” as a result of such policies, and could drive more good jobs out of the U.S.

The full Member's Statements and all witness testimony can be accessed here.

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