The Obama administration is continuing to make its case for legislation that would retroactively strip the tax advantages away from many of the year’s biggest mergers and acquisitions.
On Thursday, Mark J. Mazur, the Treasury Department’s assistant secretary for tax policy, made the case that any new laws targeting inversions – transactions that allow American companies to reincorporate abroad – should be backdated to May 2014, potentially affecting a number of multibillion-dollar deals.
Whether or any legislation against inversions is retroactive has quickly emerged as a potential sticking point between Democrats, who favor retroactivity, and Republicans, who have concerns about backdating any new laws.
In a blog post, Mr. Mazur made the case that there was ample precedent for retroactive tax legislation, and signaled that the administration would push for it.
“Congress has frequently imposed retroactive effective dates for provisions that shut down egregious tax loopholes,” he wrote. “In these cases, backdated implementation is often important to ensure that companies do not take advantage of the lengthy legislative process to rush through transactions exploiting the loopholes they know they are about to lose.”
There is growing consensus on Capitol Hill that the rush of inversions should be stopped. Lawmakers from both parties worry that the more companies move their headquarters to countries like Ireland and the Netherlands, the more the American tax base is being compromised.
And given the unlikelihood of comprehensive tax reform getting passed anytime soon, both Democrats and Republicans seem to agree that a short-term fix is needed.
But already, there is partisan disagreement about what anti-inversion legislation should look like.
The Obama administration has proposed effectively banning inversions, and making any legislation retroactive until May of this year. Such a move would affect several big deals, includingAbbVie‘s $54 billion acquisition of Shire, and Medtronic‘s $43 billion takeover of Covidien.
But at a Senate Finance Committee hearing this week, SenatorOrrin Hatch, Republican of Utah, signaled he would not support backdating a new law.
Retroactive tax legislation, he and others contend, is extremely rare and would effectively change the rules after companies have signed on to multibillion-dollar deals that are difficult and costly to unwind.
On Thursday, Mr. Mazur countered by pointing to several retroactive tax laws.
The most recent bill to target inversions, the American Jobs Creation Act of 2004, contained an anti-inversion provision that was effective from March of the previous year.
The Taxpayer Relief Act of 1997 cracked down on a loophole that allowed some companies to avoid paying taxes when getting sold. The law was backdated to May 1995.
And the Tax Relief Extension Act of 1999 contained several retroactive measures, including one targeting capital gains income generated using derivative contracts related to pass-through entities like partnerships.
“These kinds of tax provisions are hardly unusual and have been enacted as part of legislation across administrations – including an anti-inversion measure enacted by a Republican Congress in 2004,” Mr. Mazur wrote. “In fact, the practice is so frequent that the Congressional Research Service called it ‘quite common’ in a 2012 report.”
Investment bankers are advising their corporate clients that any anti-inversion legislation is unlikely to be passed this year, and that if it does get passed, it is unlikely to be retroactive.
But with Washington increasingly focused on the issue, more companies are likely to try and sign their deals sooner rather than later.