Senator to table anti-tax inversion bill this week

US Senator Chuck Schumer is determined to close the loophole that is allowing corporations to keep assets out of reach of the US taxman, and aims to claw back money from deals stretching back two decades.

The senior Democratic lawmaker wants to penalise companies that have carried out tax-inversion deals – which involve buying overseas companies in order to place assets offshore and sidestep US corporation tax – by limiting future tax deductions.

A draft of the plan – obtained by Bloomberg – suggests the amount of deductible interest for inverted companies will be halved to 25% of US taxable income from 50%, which would offset the financial advantages cited for this type of acquisition. It could be tabled as early as this week, according to some reports.

The threat of legislative action comes as three life sciences companies – AbbVie, Mylan and Medtronic – are in the process of concluding acquisitions with a tax-inversion component.

AbbVie is buying Shire of the UK for £32 billion and says in doing so will cut its tax rate from 22% to 13%, while Mylan has said its purchase of Abbott Laboratories non-US generics business will trim its rate from the high 20s to around 20%-21% in the first year and the high teens thereafter. Meanwhile, Medtronic has said its $43 billion purchase of Ireland’s Covidien will shave 1%-2% from its current rate of around 18%.

A report in the Financial Times indicates that AbbVie, Medtronic and another corporation called Applied Materials want to conclude deals so they can “unlock” cash held overseas. At the moment the three companies have around $21bn in offshore cash and they want to avoid being stung by high US tax rates if they try to repatriate it.

All told, thirteen inversion deals worth $178 billion have been announced since the start of 2013, according to Dealogic data cited by the FT. It also says US corporations – excluding financial groups – hold around $950 billion in offshore cash and liquid investments.

President Barack Obama has already pledged to do something about the tax-inversion loophole in budget statements – calling the practice “unpatriotic” – but Schumer’s bill would mark the first time that a specific legislative proposal has been tabled in the Senate.

The retrospective approach taken by the draft bill means it would not only affect companies ushering through deals at the moment, but could also have an impact on a string of historical transactions involving the likes of Endo Pharmaceuticals, Perrigo, Actavis, Alkermes, Jazz Pharmaceuticals and Forest Laboratories, amongst others.

The draft would also give the Internal Revenues Service (IRS) in the US greater powers to vet and rule on transactions proposed by US companies.

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