Democrats and Republicans in the House both agree that corporate inversions — i.e., U.S. companies reincorporating as foreign entities — present a major problem that requires action from congressional tax writers.
Whether they agree on how to fix the problem, or how to address other international tax issues, will become more clear at a Wednesday hearing of the House Ways and Means Committee.
The House leaders have tasked Chairman Kevin Brady (R-Texas) to come up with tax reform proposals that the GOP can ultimately present to the public as an example of how a Republican administration would govern on key issues. Both Speaker Paul Ryan (R-Wis.) and Majority Leader Kevin McCarthy (R-Calif.) have made it clear that updating the tax code is a top priority.
And although a comprehensive tax reform bill almost certainly won’t come up until the next Congress at the earliest, Brady has made it clear he wants to act more quickly on international tax issues. Currently, U.S. companies are operating at a considerable financial disadvantage because the American corporate tax rate (35 percent) is far higher than other countries’ rates. If U.S. firms with money stashed abroad bring it back here, they will be taxed the difference between the two rates.
Tax writers from both parties want to change the international tax code to allow U.S. firms abroad to pay only the foreign tax rate. The problem is that every time they discuss it, they run into questions about how to fix corporate taxes generally. And then someone inevitably asks about personal income taxes. And the discussion suddenly becomes infinitely more complicated.
House GOP leaders are undeterred. In the last month, Brady has upped his discussion about changing international tax measures as more corporate inversions grab headlines, including in his own district. He regularly points out how Waste Connections moved its headquarters from his district in the suburbs of Houston to Canada earlier this year.
Inversions aren’t the only international tax issue Brady is focused on. He also wants to respond to a pending European Union directive to stop corporate tax avoidance. The proposal aims to stop companies from taking advantage of the fragmented nature of individual tax systems. Brady says it would “disproportionately” make it more difficult for U.S. companies to compete in the European market.
“Worldwide, American companies are rightly concerned that the [anti tax-avoidance project] will result in higher foreign taxes, higher compliance costs, and double taxation as the project redraws the lines of cross-border taxation,” Brady said in a Feb. 12 speech to the Tax Council Policy Institute. “Ultimately, many of them could be forced to restructure their business operations and move U.S. activities, such as research and development, overseas.”
Democrats on the Ways and Means Committee, for their part, have criticized Republicans for failing to act quickly enough to prevent corporate inversions. Ranking member Sander Levin (D-Mich.) told reporters last week he would like to see more “action” from the GOP beyond hearings to address the issue.
“Republicans fail to move on inversions, and as long as they fail, there will be more inversions,” he said.
To make his point, Levin introduced a bill Tuesday with the backing of Rep. Chris Van Hollen of Maryland — the ranking Democrat on the Budget Committee — that would curb the practice of “earnings stripping,” a tactic that American firms overseas use to pay lower tax rates on earnings from business done inside the United States.
Through earnings stripping, inverted companies overload their U.S. subsidiary with debt owed to their foreign-based parent company because interest payments are tax deductible in the United States. This means the foreign-headquartered firm pays a reduced or zero tax rate, according to committee Democrats.
Levin’s bill would “limit the use of earnings stripping by corporations that engage in tax-motivated inversions” by either altering or repealing measures in the U.S. tax code that allow for the practice. At this point, it’s unclear if Levin’s proposal can gain any bipartisan steam, though Levin and other Democrats are likely to focus on the proposal at Wednesday’s hearing.
Although the House has gotten the ball rolling on tax issues, the path forward even for draft legislation in the Senate is unclear. The Senate Finance Committee doesn’t currently have any hearings scheduled about international tax reform. That doesn’t mean they aren’t watching. Chairman Orrin Hatch (R-Utah) convened working groups on a host of tax issues last year, including international taxes.
