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Senate panel takes on tax inversions

WASHINGTON — The chorus of voices on Capitol Hill calling for an end to corporate inversions grew louder on Tuesday as the Senate Finance Committee held a hearing on the issue of US companies reincorporating abroad, and legislators proposed new punitive measures against inverted companies.

Opening the hearing, Senator Ron Wyden, Democrat of Oregon and chairman of the committee, said that chief executives from several companies in the process of inverting were invited to testify, but none accepted the offer.

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Wyden went on to describe inversions as a “plague” and called for retroactive legislation that would eliminate the substantial tax benefits of many of the cross-border deals announced over the past year.

Deals including Medtronic’s proposed acquisition of Covidien and AbbVie’s agreed-upon deal to acquire Shire, among others, would be affected with retroactive legislation.

“The inversion virus now seems to be multiplying every few days,” Wyden said. “The underlying sickness continues to gnaw away at the American economy with increasing intensity.”

But there was no consensus on how to address the issue.

Senator Orrin Hatch, a Republican from Utah who is the ranking member of the committee, said that retroactive legislation taking aim at companies that have already struck deals is not the answer.

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“Rather than incentivizing American companies to remain in the US, these bills would build walls around US corporations in order to keep them from inverting,” said Hatch, referring to proposals from Wyden and Democrats in the House of Representatives. “This approach, in my view, completely misses the mark.”

Witnesses testifying before the committee were also split on how to proceed. While all sides called for comprehensive tax reform, the likelihood of that is slim in Washington’s current partisan environment.

Obama administration officials supported retroactive legislation that would immediately end inversions.

“Letting our corporate tax base erode through inversions will worsen our fiscal challenges over the coming years,” Robert B. Stack, deputy assistant Treasury secretary for international tax affairs, said in his testimony.

Stack echoed calls from Treasury Secretary Jacob Lew to enact retroactive legislation.

But while agreeing that the current system is broken, Mihir A. Desai, a professor of law at Harvard University, said punitive legislation could be counterproductive.

“Legislation that is narrowly focused on preventing inversions or specific transactions runs the risk of being counterproductive,” he said.

“For example, rules that increase the required size of a foreign target to ensure the tax benefits of an inversion can deter these transactions but can also lead to more substantive transactions.”

Senator Charles Schumer, a New York Democrat, used the hearing as an opportunity to call for legislation that would target the ability of companies that inverted to take advantage of interest expense deductions.

In such tax moves, which are often done by inverted companies, a corporation will loan one of its subsidiaries money from a different subsidiary, and receive a tax break.

“There are two reasons companies do inversions,” Schumer said in an interview. “One is to reduce taxes on their foreign earnings. The second reason is so that they can shield their US earnings by this interest deduction.”

And while acknowledging the partisan atmosphere in Washington, and the partisan split over how to address the issue, Schumer said that he believed some sort of temporary legislation targeting inversions would be passed.

“It will be a lot easier to do this than to do tax reform,” he said. “Now that there’s a focus on inversions, the pressure will mount.”

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