Democrats Seek U.S. Contract Ban to Discourage Inversions

Democrats in Congress are trying again to prevent the federal government from awarding contracts to companies that save taxes by moving their legal addresses outside the U.S.

Representatives Rosa DeLauro of Connecticut and Lloyd Doggett of Texas are introducing legislation today that would create a government-wide ban on contracts with such companies. Senators Carl Levin of Michigan and Richard Durbin of Illinois are planning a companion bill, and they say they will continue pressing for tax-law changes to limit so-called inversions.

“One way or another, we are going to stop the obscenity called inversion,” Levin told reporters at a news conference in the Capitol.

The proposal would ban subsidiaries or joint ventures that are at least 10 percent owned by an inverted corporation from getting contracts. It would expand an existing ban to cover companies that changed addresses after buying a smaller foreign company, perhaps capturing Tyco International Ltd. and Eaton Corp. Plc if it becomes law.

The proposal includes exceptions for national security and for companies that have “substantial” operations in the country where they have their legal address. DeLauro said the lawmakers were “looking at” whether to limit the companies’ access to federal funds from Medicare and Medicaid, a move that could be damaging to the pharmaceutical and medical-device companies that have completed inversions.

Little Power

House Democrats, who are in the minority and can’t control the chamber’s calendar, have little power to affect the outcome of legislative debates.

Still, contracting policy changes have drawn less criticism from Republicans than the retroactive tax bills that Democrats are promoting. Congress has imposed temporary contracting bans, which are worded more narrowly than the prohibitions being proposed by Democrats, for five of the past seven fiscal years.

So-called inversions are transactions in which a U.S. company shifts its legal address to a country such as Ireland or the U.K. with a lower corporate tax rate, often through the acquisition of a smaller company abroad.

Medtronic, AbbVie

Companies including Medtronic Inc. (MDT) and AbbVie Inc. (ABBV) have pending inversion deals and Walgreen Co. (WAG) is considering an inversion. President Barack Obama recently labeled those companies “corporate deserters” and called for changes to U.S. tax law to limit the transactions.

The House has included limits on contracts for inverted companies incorporated in Bermuda or the Cayman Islands in four separate spending bills for fiscal 2015. A committee in the Democratic-led Senate included broader limits in a defense spending bill.

None of those bills has become law. The federal fiscal year starts Oct. 1 and Congress is unlikely to reach a resolution on the issue until September. The limits introduced today would be permanent, compared with the one-year bans that are attached to one-year spending bills.

Representative John Mica, a Florida Republican who is chairman of the subcommittee that oversees contracting policy, said he hadn’t reviewed the bill yet.

In a blog post today, the U.S. Chamber of Commerce criticized the proposal.

‘Buy American’

“By any protectionist standard, these proposals exceed even the most extreme ‘buy American’ legislation enacted during the Great Depression,” wrote Christian Zur, senior director of government procurement policy at the nation’s largest business group. “Left out in this current political debate on federal procurement policy is best value for the taxpayer.”

A Bloomberg News investigation published July 8 found that the current government-wide ban failed to prevent many companies from obtaining federal contracts. More than a dozen companies shifted their address offshore and continued to receive more than $1 billion annually from the government.

That’s in part because the current law defines an inverted company so narrowly that most companies that inverted aren’t covered by it. DeLauro said today’s bill is an attempt to close loopholes that companies have found.

“When the tax bill comes due, they hide overseas,” she said. When it’s time to get federal contracts, “they are as American as Uncle Sam.”

To contact the reporters on this story: Richard Rubin in Washington at rrubin12@bloomberg.net; Derek Wallbank in Washington at dwallbank@bloomberg.net

To contact the editors responsible for this story: Jodi Schneider at jschneider50@bloomberg.net Laurie Asseo

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