Why did NJ Lawmakers Advance Bill To Fight Corporate Inversions?

A New Jersey Senate committee on Monday advanced legislation to prohibit awarding state contracts and development subsidies to companies that seek to reduce their taxes through so-called inversion transactions.

The Senate’s State Government, Wagering, Tourism and Historic Preservation Committee signed off on Senate Bill S-1513, which would deny such taxpayer support to companies that engage in corporate inversions, a deal structure that sees a U.S. corporation merge with a foreign company and relocate its tax residence in a foreign jurisdiction in an effort to trim its U.S. corporate tax burden.

The legislation now heads to the Senate Budget and Appropriations Committee for further consideration.

Under the legislation, any company incorporated or previously incorporated in the U.S. that becomes incorporated in a foreign country or becomes a subsidiary of a corporation incorporated in a foreign country for the primary purpose of avoiding U.S. taxes would be disqualified from receiving state contracts and subsidies. That rule also would apply to funds from independent state authorities.

It is unclear why legislators think such a law would benefit New Jersey as corporate inversions take place because of the federal tax code rather than state.

 

Inversion Regs Cast Wider Net

The U.S. Department of the Treasury on Monday issued rules to curb tax-motivated inversions, and while much of the immediate attention focused on how they would affect the proposed Pfizer-Allergan merger, the regulations could ensnare other kinds of cross-border deals or even domestic transactions.

The regulations issued Monday formalized notices put out by the Treasury in 2014 and 2015 saying the administration would write rules to make it more difficult for companies to merge with competitors in low-tax jurisdictions. The regulations included new measures not mentioned in the previous announcements, such as a provision to prevent companies from getting around existing inversion rules by acquiring multiple companies over a short time, as Allergan Inc. has done.

The Treasury also issued proposed regulations to combat the practice of earnings stripping, one of the primary ways inverted companies reap tax benefits from inversions and which involves saddling domestic affiliates with debt and taking a U.S. tax deduction on the interest.

The government may have written the rules to target inversions, but the more than 300 pages of regulations touch on so many different sections of the tax code that other transactions could be caught up as well.

Firms may have to take another look at deals going back more than a year and a half to see if they comply with the rules. The regulations implementing the 2014 notice apply to transactions completed on or after Sept. 22, 2014, while the regulations formalizing the 2015 announcement apply to acquisitions completed on or after Nov. 19, 2015. The new measures introduced Monday apply to transactions completed on or after April 4.

The proposed earnings-stripping regulations in particular have a wide scope that goes well beyond inversions and would encompass debt transactions that are commonly used by multinational or domestic groups of related corporations.

Under the proposed rules, the IRS said it would treat as stock certain transactions that would otherwise be considered debt, such as instruments issued by a subsidiary to its foreign parent in a shareholder dividend distribution or instruments issued in connection with some acquisitions of stock or assets from related corporations in transactions economically similar to dividend distributions.

The proposed regulations specifically mention a court case from 1956, Kraft Foods Co. v. Commissioner, in which the Second Circuit considered a domestic corporate subsidiary that issued indebtedness in the form of debentures to its sole shareholder, which was also a domestic corporation, in the payment of a dividend. In the case, the government argued that the transaction may have been a sham and should have been treated as stock, but the court sided with Kraft, saying the debentures should be respected as debt.

In the proposed regulations, the IRS said going forward it would treat a debt instrument issued in fact patterns similar to that in Kraft as stock, thus unsettling well established law.

The breadth of the regulations will have implications well beyond inversions and will affect not only foreign companies and inverted companies but U.S. companies as well, Bazar said.

One of the new provisions in Monday’s regulations would target so-called serial acquirers who purchase multiple U.S. companies in quick succession to get around an existing rule that penalizes inversions in which the former stockholders of the U.S. company retain at least 60 percent ownership in the newly combined foreign company. If the former stockholders retain at least 80 percent ownership of the new company, the transaction is completely disregarded for U.S. tax purposes.

In the regulations, the Treasury said it was concerned that a serial acquirer could subvert the rule by issuing stock with each successive purchase of a U.S. company, thereby increasing its ownership and enabling acquisition of an even greater domestic company without crossing the 60 percent threshold. To that end, the regulations exclude from that ownership calculation stock that is issued by a foreign corporation in connection with the acquisition of U.S. entities in the prior three years.

 

New Jersey Gov. Chris Christie Absolute Veto- “Made in America Bill”.

New Jersey Gov. Chris Christie on Thursday vetoed a package of bills that would have required the use of U.S.-manufactured goods for a greater number of public contracts, including 50% US. sourced components, contending that the measures would hurt international development and increase costs for the public.

New Jersey already requires U.S.-manufactured goods for public works contracts, local public contracts, state construction contracts and local school contracts, but S1881 — which the state Legislature sent to the governor in December — would have covered all state contracts, including those of state universities. Companion bills sought to impose similar requirements on four bi-state agencies: the Port Authority of New York and New Jersey, Delaware River Joint Toll Bridge Commission, Delaware River Port Authority, and Delaware River and Bay Authority.

Christie said in his veto messages that the bills would “constrain purchasing decisions by setting artificial thresholds of reasonableness based almost exclusively on price.”

As a strong indicator where he stands on corporate inversions, Christie also had kind words for foreign-headquartered companies, which he said are responsible for more than 225,000 jobs in the state.

“These global companies seek global marketplaces that will support their investments. Those companies, in turn, infuse billions of dollars into New Jersey’s economy, not only in direct investment and jobs, but indirectly to thousands of other New Jersey businesses that provide goods and services to support their operations,” the governor said. “In stark contrast, these bills will chill international development and increase costs borne by taxpayers.”

While lawmakers tried to build flexibility into the proposed requirements by allowing public entities to secure waivers if U.S.-made products weren’t available or were too expensive, Christie said the end result would have been a more-complex bidding process and more-burdensome reporting requirements.

“Rather than helping Americans, these bills will simply drive up the price of doing business, and threaten job creation,” the governor said. “Building economic walls around our state, or our nation, will not improve the lives of our citizens.”

In a statement, Senate President Steve Sweeney, D-Gloucester, stated that  the veto was  a missed opportunity to support domestic businesses.

“The ‘made in America’ bills are more than an expression of economic patriotism. They could have been an effective way of boosting the state’s economy,” said Sweeney, a sponsor of the measures. “The recovery in New Jersey has lagged behind other states, so we should be doing all we can to generate economic growth and to promote economic opportunity.”

But the governor’s action won praise from the New Jersey Business and Industry Association.

“Governor Christie made the right decision,” NJBIA President Michele Siekerka said in a statement. “The bill would be unworkable given the nature of modern global supply chains, which make it difficult to find goods with U.S.-sourced components.”

New Jersey Senate would crack down on corporate inversions

Tax inversions are to some unpatriotic and unethical; they speak to the need for more loophole-thwarting regulations and tax reform. To others, the real threat to the U.S. corporate tax base is our corporate tax code itself, with the third-highest overall rate in the world and a worldwide system that requires American companies to pay a toll charge to bring their profits back home. Thus, the solution to the inversion “problem” is to dramatically cut the corporate rate and to move to a territorial tax system, not add even more unnecessary rules to an already complicated tax code.

Meanwhile, three measures in the New Jersey Senate that would crack down on corporate inversions by banning inverted companies from state contracts and other subsidies were voted out of committee Thursday, the latest move to stem the tide of companies pursuing mergers to reincorporate in tax-friendly jurisdictions outside the U.S.

In a 3 to 2 vote on Thursday afternoon, the New Jersey Senate State Government, Wagering, Tourism & Historic Preservation Committee passed bills S2397, S2361 and S2471, which would ban the award of state contracts other state subsidy grants to corporations that merge with foreign companies or shift their income abroad in order to avoid U.S. tax obligations.

New Jersey Sen. Shirley Turner, D-Mercer, who sponsored two of the bills said at the meeting that the measures are meant ensure that corporations who take advantage of the services and quality of life of this country pay their “fair share” of taxes. She pointed out that U.S.-based corporations are beneficiaries of the country’s educated workforce, transportation infrastructure and safety, among other advantages, that are made possible through taxes.

However, opponents of the bills expressed concern that punishing corporations for what amounts to a “paper move” will scare companies away from investing in the state and hinder job creation.

Under the bills, inverted corporations would be ineligible for state contracts, economic development grants and other types of financial aid including reimbursement of taxpayer-subsidized programs, such as Medicaid.

Turner also introduced a joint resolution calling on federal lawmakers and the President to enact the “Stop Corporate Inversions Act of 2014.”

“The increasing trend of corporate inversions is not just a Washington problem; it’s a New Jersey problem, too,” Turner said in a statement released Thursday. “When multi-billion dollar corporations shift their income abroad to reduce their U.S. corporate tax rate, the state can no longer tax those corporate profits. Every other taxpayer must then pay more to make up for the lost revenue in order to maintain government services. It’s no wonder the state can’t meet its financial obligations.”

The growing popularity of inversions has spawned backlash from the Obama administration, which in September  introduced several rule changes stripping away tax benefits of inversion deals. However, with legislative changes still necessary to completely shut down inversions, U.S. Treasury Secretary Jacob Lew said this month that the White House is not done looking at its administrative options.

Meanwhile, Senate Finance Committee Chairman Orrin G. Hatch, R-Utah, said last week that corporate tax reform that moves the country to a territorial system of taxation is the best solution to stop corporations from pursuing tax inversion deals.