As far as tax loopholes go, “inversion” has officially made it into the big leagues.
The once obscure practice has been thrust into the spotlight by the President (who called inversions “unpatriotic”); Jon Stewart (who said the practice was equivalent to “gender reassignment” for corporations); and Steven Colbert (“it’s like me adopting an African child, then claiming myself as his dependent.")
So what is inversion? It’s when a US company purchases a business overseas, then relocates its official headquarters to the new subsidiary’s foreign address. This allows the company to effectively avoid paying US taxes.
Right now, as long as that foreign branch comprises 20% of a company’s business, this practice is completely legal. President Obama wants to raise that threshold to 50%, and Democrats introduced the legislation in late July.
Not surprisingly, closing this loophole may be easier said than done. While Democrats support the President’s push, Republicans would prefer to hold out for large-scale tax reform.
“I think it’s very important to plug the inversion loophole now, and I think we can do that in a way that’s consistent with long-term tax reform,” said Sen. Ron Wyden (D, Ore.).
Wyden heads the Senate Finance Committee, which held a hearing on the issue in July. He’s quick to emphasize a need for total tax reform, but supports the Democrats’ push to close the inversion loophole as soon as possible.
There’s a reason Democrats want to move quickly. Recently, there has been a boom in deals that qualify for tax inversion – the most high profile of which is Pfizer’s (PFE) failed attempt to buy British drug maker AstraZeneca (AZN) for nearly $120 billion.
“There’s a kind of frenzy out there with respect to these inversions,” Wyden said. “Inversions, of course, distort free markets. They create winners and losers… you effectively have two sets of rules.”
While Wyden does not limit his criticism of tax codes to inversions (calling the federal tax code a “rotting economic carcass that’s infected with chronic diseases like loopholes and inefficiencies”), it’s one of the few tax loopholes he thinks can be closed before January, when a new Congress is sworn in.
In the meantime, expect to hear the word “inversion” bandied about in the upcoming Congressional elections. Because nothing sways Midterm voters more than finger pointing over corporate tax evasion.