American companies that moved their official headquarters offshore to avoid U.S. taxes could qualify for coronavirus aid from the Federal Reserve, tax lawyers say, raising new questions about which firms should get access to public money.

Under guidelines published by the Fed, companies that engaged in so-called "corporate inversion" transactions while maintaining meaningful U.S. operations appear to be eligible for two new programs designed to provide credit to large employers by purchasing new or outstanding corporate bonds.

"Under no circumstance should a company that has moved overseas to avoid U.S. taxes get a bailout," said Senator Ron Wyden of Oregon, the top Democrat on the Senate Finance Committee. "The Fed is kicking dirt in the face of American workers with this move."

Whether any companies that have benefited from such maneuvers would seek the Fed's help isn't yet clear. Nonetheless, politicians' bipartisan distaste for inversions, in which U.S. companies merge with foreign firms and then take offshore tax addresses, stands to underscore the issue. Former President Barack Obama called them "unpatriotic," and President Donald Trump has said they're "disgusting."

At the same time, however, tax experts—including some who strongly oppose inversions—say the Fed's guidelines are meant to help companies with large U.S. footprints, regardless of their tax-avoidance strategies. Allowing "inverted" companies to use the Fed's facilities makes sense because the firms are still largely American and retain U.S.-based workforces, despite their new legal addresses in places like Bermuda or Ireland, said Reuven Avi-Yonah, a corporate and international taxation professor at the University of Michigan Law School.

"I don't see any good economic reason to exclude inverted companies," said Avi-Yonah, who has criticized inversion transactions as a tax-avoidance technique for decades. "They are just as American as other companies—that is, in fact, the problem with inversions in the first place."


Fed Eligibility Guidance Is Coming

The U.S. central bank has said it plans to enhance and update its guidance for the two bond-purchasing facilities with, among other things, "issuer certification requirements." Yet the New York Fed's existing guidance says that to be eligible, a company must have "significant operations in and a majority of its employees based in the United States." That would include inverted companies.

Such firms typically meet those requirements, said Robert Willens, an independent tax consultant. "So long as the inverted company uses the proceeds in the approved manner, there should be no question regarding their eligibility."

The Fed's Secondary Market Corporate Credit Facility, which is buying outstanding bonds and exchange traded funds, began making limited purchases Tuesday. The U.S. central bank has yet to announce a start date for the Primary Market Corporate Credit Facility, which will provide a backstop for new debt issuance.

Tax lawyers created corporate inversions in the early 1980s as a way for companies to escape what was then a 35 percent corporate tax rate in the United States. The deals, which allow companies to book income offshore while retaining much of their American workforce and corporate structure, became popular in the 1990s and 2000s. But they largely stopped after the Obama administration issued regulations making inversions less profitable in 2016, and Trump signed a 21 percent corporate tax rate into law in 2017.

More than 80 American companies, including medical device maker Medtronic Plc and insurer Everest Re Group Ltd, have effectively renounced their U.S. citizenship since 1982. Medtronic and Everest went to the low-tax jurisdictions Ireland and Bermuda, respectively.

Medtronic declined to comment for this story. Everest didn't respond to a request for comment.


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The White House has been trying to persuade companies that have left the United States or outsourced workers to bring back jobs, operations, and assets, though success has been limited. Trump on Thursday floated levying additional taxes on companies that manufacture products outside the U.S. Larry Kudlow, the president's top economic adviser, suggested on Friday cutting the 21 percent corporate income tax rate to 10.5 percent for companies that repatriate.

"I'm a believer in rewarding, not punishing," Kudlow told reporters at the White House Friday. "Why not provide a 50 percent discount for the corporate tax rate if you're moving from outside the U.S. to the U.S.?"

Some countries have taken steps to withhold virus aid from companies that practice aggressive tax avoidance. In France and Denmark, governments have said that companies operating in tax havens won't qualify for taxpayer-funded bailouts. The Fed's two corporate credit programs have a combined size of $750 billion, and and they're backed by allocations of $75 billion from the Treasury Department.

In the United States, questions regarding which firms should be able to tap portions of the massive federal bailout have persisted as the Fed, the Treasury Department, and the Small Business Administration have quickly shoveled hundreds of billions of dollars into an economy largely paralyzed by Covid-19.

In particular, a relief program aimed at small businesses has faced scrutiny by Congress and federal officials after the Los Angeles Lakers and publicly traded companies like Shake Shack Inc. qualified for the forgivable loans.

The Fed facilities will come under closer scrutiny once they begin disclosing aid recipients. The central bank has announced plans to publish the names of participants in various facilities, with such details as amounts and interest rates, on its website at least every 30 days.

The loans could also become an area of interest for the Congressional Oversight Commission, a bipartisan group in charge of scrutinizing the central bank's decisions.

While the CARES Act doesn't explicitly require the Fed to impose restrictions such as payroll retention on companies it lends to, some members of the oversight panel expect the bank to answer to how it is helping American families.

In cases where the U.S. Treasury or the Fed have broad discretion over programs, "the oversight commission has a right to ask why those decisions are being made and what the impact is of those decisions on American families," Bharat Ramamurti, a Democratic member of the panel, said in an interview with PBS.

"My concern is that we seem to be helping the corporations and their creditors, which in many cases are banks, rather than the people that are actually employed by those companies," he said.

That panel, however, has yet to begin much oversight work. House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell haven't named a chairman to oversee it, and the group missed its first legally mandated reporting deadline this month, raising questions about the group's nimbleness to examine what could amount to trillions in loans.

Earlier this month, Ramamurti was one of the first observers to raise questions about the wisdom of letting inverted companies qualify for Fed aid. In a Twitter posting, he said the central bank's guidance "opens the door to providing U.S. taxpayer support to companies that 'inverted.'"

Whether to keep that door open depends on policymakers' goals, tax lawyers say.

"It's a question of: Do you want to give relief to companies that employ U.S. workers, or are these bad guys we never want to help?" said Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. "The Fed wants to shovel as many dollars out the door as it can. They are not being very discriminant."

—With assistance from Saleha Mohsin & Justin Sink



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