Finding a Cure for the Inversion Virus

by FEI Daily Staff

Chairman of the Senate Committee on Finance Ron Wyden (D-Ore.) opened the hearing on July 22 calling to cure what he called “the inversion virus” that has been infecting America.


The focus of the hearing was, titled  “The U.S. Tax Code: Love It, Leave It or Reform!” focused on corporate inversions; the act of moving a company’s headquarters out of the U.S. in order to receive lower tax rates.

A decade ago, Congress passed legislation meant to resolve this issue, but it failed to do so, according to Sen. Wyden. While most inversions have occurred in the medical field, there is evidence that the trend is spreading to manufacturing and retail. The tax code is convoluted, discourages competition, and needs to be reformed.

Ranking Member Orrin Hatch (R-UT) agreed with the need to reform the corporate tax law. Sen. Hatch warned against punitive and retroactive measures which would build walls around the U.S. in an attempt to keep companies from inverting. Sen. Hatch said that plans like the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) project can have negative consequences because BEPS may be used by other countries to increase taxes on American taxpayers. The solution, he offered, is to severely reduce the corporate tax rate and move the U.S. towards a territorial tax system.


Testimony was given by Robert Stack of the U.S. Department of the Treasury, Pascal Saint-Adams of the OECD, Mihir Desai Professor of law at Harvard University, Peter Merrill of Pricewaterhouse Coopers LLP, Leslie Robinson Professor of Business at Dartmouth, and Allan Sloan Sr. Editor at Large of Fortune Magazine.


Robert Stack and Pascal Saint-Adams spoke of the importance of the BEPS project. The intention of the OECD, they explained, is to address the inversion problem with the knowledge that one country cannot unilaterally address an international issue. BEPS is intended to produce tools for countries to more easily address issues such as double taxation in the hopes of improving economic growth. Additionally, Robert Stack showed support for improving the current anti-inversion statute put into place in 2004 by requiring companies that retain a close connection to the U.S. after inverting to continue being treated as a domestic corporation for federal income tax purposes.

Mihir Desai warned against legislation that focused on preventing inversions, believing that by requiring inverted companies to be more disconnected from the U.S. in order to receive their desired tax rate, Congress would create incentive for companies to lessen their U.S. activity and consequently lessen economic growth.

Peter Merrill and Leslie Robinson support revising the U.S. corporate tax system so that is in line with international norms. Professor Robinson suggested that by limiting deferral and lowering the statutory tax rate Congress would effectively reduce the incentive corporations have to invert.

Allan Sloan stated his belief that Congress needs to address inversion first, likening it to how a doctor must put on a tourniquet before dealing with the wound. He voiced support for the Senate version of the anti-inversion legislation and the May 8, 2014 cutoff date, so that Congress will temporarily avert inversions but continue to feel pressure to fix the corporate tax code.

The one issue of consensus was that the corporate tax rate needs to be lowered. When this will happen remains up in the air, however, it is possible that concerns regarding inversions may act as a catalyst to address corporate tax reform sooner than otherwise.