Love It and Leave It?

The hue-and-cry over inversions may change the way overseas income is taxed.

Could any new legislation force inverted companies to repatriate? Experts doubt it, but they point out that the legislation and the recent publicity may deter others. “The political heat is not to be underestimated,” says Jones. “[Inversion] is a very hot potato right now. That is probably the biggest disadvantage–the perception that it is unpatriotic.”

As for the larger international tax issues, Congress is between a rock and a hard place. To mollify the EU, it must repeal ETI–without trying to squeeze yet another version past the WTO. That’s bound to anger U.S. firms. But if Congress does nothing, the EU will likely start levying punitive duties against U.S. exports. And the EU is not likely to wait around for years of congressional fighting over a complete overhaul of the U.S. taxation system. No wonder Congress is so angry at the companies that caused all this fuss.

Tim Reason (timreason@cfo.com) is a staff writer at CFO.

Follow The Sun: Who’s Inverting Where?*

Company Country of Incorporation Year Inverted
Helen of Troy Bermuda 1994
Electric Mutual Liability Insurance Bermuda 1995
Triton Energy** Cayman Islands 1996
Tyco International*** Bermuda 1996
Everest Reinsurance Holdings Bermuda 1999
Fruit of the Loom Cayman Islands 1999
PX Re Bermuda 1999
TransOcean Sedco Forex Cayman Islands 1999
White Mountain Insurance Group Bermuda 1999
Xoma Bermuda 1999
Applied Power Bermuda 2000
Accenture Bermuda 2001
Foster Wheeler Bermuda 2001
GlobalSantaFe*** Cayman Islands 2001
Ingersoll-Rand Bermuda 2001
Cooper Industries Bermuda 2002
Nabors Industries Bermuda 2002Y’
Noble Cayman Islands 2002Y’
The Stanley Works Bermuda 2002Y’
Weatherford International Bermuda 2002Y’

*A partial list
**Purchased in 2001 by Amerada Hess
***Inverted through merger with existing offshore company
Y’Planned
Sources: Company News Releases, Press Reports

No Getaways Here

Both the May Treasury report on inversions and the REPO legislation propose a tightening of Section 163(j) of the U.S. Tax Code, which currently caps the deduction for interest expenses paid to related parties. “The prevalent use of foreign related-party debt in inversion transactions is evidence that these rules should be revisited,” notes the report, adding that any changes should not be limited to inverted companies, but should also be applied to those businesses that had foreign parents from the outset, or to foreign corporations that acquire U.S. operating groups.

The REPO Act also tightens the 163(j) rules for interest paid to U.S. lenders when the guarantor is a related tax-exempt or foreign person. And, notes Lehman Brothers’s Robert Willens, “for this purpose, the concept of guarantee goes well beyond the ordinary understanding of the term.” In other words, any company with a foreign parent may now have a harder time deducting interest payments.

Also likely to be affected are captive insurance companies–another form of inversion. As the report states: “Consideration should be given to whether the use of related-party reinsurance permits inappropriate shifting of income from the U.S. members of a corporate group to a new foreign parent and its foreign affiliates.” – T.R.

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