Corporate inversions and the "shipping of jobs overseas" by US corporations have long been hot-button issues in US politics. And these have resurfaced thanks to efforts by Democrats in Congress to prevent companies practising these policies from accessing financial support during the COVID-19 crisis.
What is a Corporate Inversion?
A corporate inversion is a corporate merger or restructuring whereby a US company is taken over by a (usually smaller) foreign rival or subsidiary.
This often has the effect of shifting the company's tax base to a lower-taxed jurisdiction while its management operations remain in the US. In many cases, the company remains majority-owned by the original shareholders.
US responses to Corporate Inversions
Generally, inversions are perceived as tax optimisation schemes. Up to now, attempts to legislate against these practices to penalise inverted firms with less favourable tax rules have been largely unsuccessful.
The administration of President Trump took a different approach to the issue by substantially cutting the US corporate tax rate from 35% to 21% with the 2017 Tax Cuts and Jobs Act, which alongside other measures was supposed to have removed incentives for US companies to invert.
Democrats remain critical of inverted companies because, despite likely paying less in tax, they may take advantage of various domestic tax breaks and support measures, including those introduced to support businesses during the COVID-19 pandemic.
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The American Assistance for American Companies Act
In response, Democrats recently introduced bills in Congress to prevent inverted companies, or those outsourcing jobs overseas, from utilising such support measures.
One such bill is the American Assistance for American Companies Act, submitted to Congress on 24 June 2020.
Specifically, the bill is intended to prevent inverted companies from accessing certain tax breaks and emergency lending programs included in the CARES Act, signed by President Trump in March 2020. These measures include relaxed loss carry-back rules, and a temporary increase in the amount of interest expense businesses can deduct on their tax returns from 30% of earnings to 50%.
This bill would permit an inverted domestic corporation to qualify for CARES Act assistance only if it retroactively elects to be treated as a domestic corporation beginning in 2017, with payment of back taxes or penalties due in 2021.
The End Outsourcing Act
Another bill, the End Outsourcing Act, introduced in the Senate on 10 March 2020, does not specifically target inverted companies. Instead, it seeks to prevent companies that have outsourced jobs overseas from receiving federal tax incentives and grants.
Unlike the more recent bill, these proposals include an element of carrot as well as a stick, by offering companies a 20% tax credit for bringing jobs back to the US.
However, the bill would also require companies that have outsourced jobs within a five-year period to pay back federal tax incentives and grants from facilities closed due to outsourcing.
In light of the politically divided Congress, and with presidential elections less than six months away, it seems doubtful that either of these bills will be approved, as they lack the level of bipartisan support that would enable them to become law.
Nevertheless, with the election outcome uncertain, future changes along these lines should not be ruled out.