After an impressive victory in Congress this November, some Republican lawmakers have shown early signs of backing off from one of the hottest issues of 2002 - corporate inversion, a legal manoeuvre that lets some American companies avoid US taxes by shifting their headquarters overseas.

Several House Republicans indicated this week that while inversions will remain a concern in the next Congress, they are likely to be addressed only as part of a broader examination of the US tax code.

Rep. Bill Thomas (R-California), the powerful Chairman of the House Ways and Means Committee, said inversions are merely a symptom of a larger problem with the tax code, which he called "antiquated" and "in need of fundamental reform." Although Thomas has taken steps this year to crack down on inversions, he has done so only through sweeping revisions proposed to the tax code.

"That is the more serious issue," Christin Tinsworth, Thomas' spokeswoman on the Ways and Means Committee, said yesterday. "The concern about inversions is that you need to deal with the underlying code, not just punish companies that move overseas. By simplifying the code you can make it fairer for corporations so they don't have the incentive to go to Bermuda."

Bermuda has long been a choice destination for corporations seeking to invert and has received its share of attention in recent months as Congressmen from either side of the aisle have blasted companies like Ingersoll-Rand, Tyco, and Accenture for setting up shop here.

The companies exploit a wrinkle in the US tax code known as the "Bermuda loophole." It can save them millions of dollars in annual payments. For the moment, at least, the loophole will stay open as Thomas and other Republican legislators focus on what they consider more important problems.

According to Tinsworth, Thomas has no intention of introducing a specific inversions bill when Congress reconvenes in January, although he does "expect to deal with the issue in the coming year," primarily by reevaluating the tax code.

House Republicans like Rep. Nancy Johnson (R-Connecticut) and Rep. Scott McInnis (R.-Colorado) who once spoke out stridently against inversions appear to be following Thomas' lead. Earlier this year, McInnis said stopping inversions was a matter of "patriotism."

And Johnson won a tight election race this fall by campaigning against "un-American" corporate relocations. But neither Representative has a concrete plan to reintroduce the anti-inversion bills they sponsored last session as members of the Ways and Means Committee. Spokesmen for both Johnson and McInnis insist, however, that inversions will be a "priority" in the next Congress.

"The issue has tied itself in one way or another with general international tax provisions," said Christopher Hatcher, McInnis' legislative director. More specifically, Hatcher said, "It's been tied in with Chairman Thomas' bill [to revise the tax code."

The direction Republicans are poised to head may lessen the scrutiny on expatriated companies in the near future, but it irks Democrats who have battled inversions for months and feel that talk of wholesale tax reform is more palaver than policy.

"I don't see one bit of evidence that these guys who profess this interest in restructuring the tax code are about to do it," Rep. Richard Neal (D-Massachusetts) said yesterday. "I've listened to all this rhetoric about pulling the tax code up by its roots, driving a stake through its heart, and moving from a progressive tax to a flat tax or a VAT. I think a lot of that is a veneer to try to take the heat off of this [inversion issue."

Neal sits on the Ways and Means Committee and was the first member of Congress to attack inversions. He insists he will keep fighting to close the loophole. "I don't blame Bermuda for writing these tax laws," he said. "I blame these companies for trying to take advantage of them. It's been two years I've been hollering about this and I intend to stay right at it."

Neal's own bill, which never came up for general debate in the last Congress, deals only with inversions and is more restrictive than the Thomas legislation. Neal intends to reintroduce it in January.

"It will gain new life when we return," he said. "I'm going to go out and seek every Democratic name and see if I can get the Republicans that have signed on in the past on my legislation. I think there is going to be enough pent-up demand to do something about it."

Even though Democrats will be further outnumbered in the House in January, Neal remains optimistic, in part because he sees a strong ally in Sen. Chuck Grassley (R-Iowa)., the Chairman-to-be of the Senate Finance Committee. "Grassley has been very supportive of my position," Neal said. "With him in charge on the Senate side, that gives us a little more traction because this can be put together as a bipartisan bill." Grassley has been a dogged opponent of corporate expatriation and has vowed to put a stop to the practice.

"Enough is enough," Grassley has said in previous interviews. "It's time for serious legislation on this issue. If companies don't have their hearts in America, they ought to get out."

Grassley said his early priorities for the next Congress include "working for full Senate passage of legislation to rein in corporate tax shelters and corporate inversions." American companies operating out of Bermuda are sure to take note of this language. "The one thing that we've learned over the last year is that this is a very unpredictable landscape," said Paul Dickard, the spokesman for Ingersoll-Rand. Dickard said that the Republican win in Congress will not allay any fears at his company.

"The new makeup of Congress is not likely to change what we've been confronting for the last year," he said. Dickard acknowledged that a Republican effort to reform the US tax code would be better for Ingersoll-Rand but was sceptical about any future legislation.

"How they take that awareness [of problems in the tax code and fashion it into policy is something that we're just not certain about."

In what may be a telling move, the Senate this week voted against an amendment to strike several provisions from the Homeland Security bill. One of the provisions allows inverted American companies to contract with the federal government. The amendment sparked a furious debate on the Senate floor that lasted for days.

Faced with the prospect of not passing Homeland Security this session, Senate and House Republican leaders and the Bush administration guaranteed to undo the provisions early next year. Three Democrats and three moderate Republicans then cast the decisive vote in killing the amendment and speeding the passage of the Homeland Security bill. But it remains to be seen whether Republican leaders will follow through on their promise to remove the provisions when Congress reconvenes. Their decision could be an important factor in the battle against corporate inversions.

If Republicans equivocate, they will energise the Democratic opposition and face charges of caving to corporate interests. What's more, they will risk alienating members of their own party, especially in the Senate. If that happens, anti-inversion legislators like Richie Neal and Chuck Grassley may close the Bermuda loophole sooner than anyone expects.