Four Democratic lawmakers have introduced the “Stop Corporate
Inversions Act of 2015,” which would tighten restrictions on corporate tax inversions.
The proposed legislation is expected to save the U.S. nearly $34 billion in
revenue, according to a recent estimate from the Joint Committee on Taxation.
If enacted, the proposed legislation would be effective for any inversion
transactions completed after May 8, 2014.
Background. In general, an inversion is a transaction in which a
domestic corporation or partnership becomes foreign (i.e., an expatriated
entity), without moving out of the U.S. in a practical sense. For example, a
U.S. parent corporation of a multinational group may undertake a series of
transactions to become a subsidiary of a foreign corporation, after which the
foreign corporation is the parent of the multinational group. Furthermore, by
restructuring to move the foreign subsidiaries out from under the U.S.
ownership chain, U.S. taxpayers attempt to avoid the U.S. anti-deferral rules.
A corporate inversion occurs when a U.S. corporation moves to a
foreign jurisdiction and becomes domiciled in the foreign country. Corporate
inversions have received much attention, with legislators expressing concern
over the loss of corporate tax revenue from U.S. corporations moving to lower
tax jurisdictions.
In 2004, to discourage U.S. companies from entering into
inversion transactions, Congress enacted Code Sec. 7874. However, since the
provision was enacted in 2004, there have been approximately 40 corporate
inversions, according to the press release accompanying the introduction of the
Stop Corporate Inversions Act of 2015.
On Sept. 22, 2014, Treasury and IRS issued Notice 2014-52,
2014-42 IRB 712, to take targeted action to reduce the tax benefits of — and
when possible, stop — corporate tax inversions. Treasury and IRS viewed
corporate inversions as motivated substantially in part by the ability to
undertake certain post-transaction steps to reduce U.S. taxation. The Notice
announced the intention to issue regulations under Code Sec. 304(b)(5)(B), Code
Sec. 367, Code Sec. 956(e), Code Sec. 7701(l), and Code Sec. 7874. According to
the Notice, such future anti-inversion guidance would apply prospectively from
the date of issuance, but only to groups that completed their business
combinations on or after Sept. 22, 2014.
Stop Corporate Inversions Act of 2015. On Jan. 20, 2015, Senate
Minority Whip Dick Durbin (D-IL), House Ways and Means Committee Ranking Member
Sander Levin (D-MI), Senator Jack Reed (D-RI), and Representative Lloyd Doggett
(D-TX) introduced the Stop Corporate Inversions Act of 2015. The proposed
legislation was originally introduced in May by Levin and three dozen other
Democrats.
Under current law, a corporate inversion will not be respected
for U.S. tax purposes if at least 80% of the new combined corporation
(incorporated outside the U.S.) is owned by historic shareholders of the U.S.
corporation (or, in the case of a partnership, interest owners of the
partnership). Alternatively, if at least 60% (but less than 80%) of the
combined foreign corporation is owned by historic shareholders of the U.S.
corporation, the inversion itself will be respected, but the expatriated entity
will be subject to certain adverse tax consequences (i.e., inversion gain).
However, these anti-inversion rules do not apply if the expanded affiliated
group that includes the combined corporation has substantial business
activities in the foreign country where it is incorporated.
The proposed legislation includes the following amendments to
Code Sec. 7874:
(1) It would treat a
combined foreign corporation as a domestic corporation if the historic shareholders
of the U.S. corporation own more than 50% of the combined foreign corporation.
(2) It would treat a
combined foreign corporation as a domestic corporation if the affiliated group
that includes the combined foreign corporation is managed and controlled in the
U.S. and engages in significant domestic business activities in the U.S.,
regardless of the percentage ownership in the new combined foreign corporation.
(3) It would repeal the
60% to 80% ownership test as well as the inversion gain applicable where there
is 60% to 80% ownership.
(4) It would maintain the
foreign substantial business exception under Code Sec. 7874, by exempting the
affiliated group if the combined foreign corporation has substantial business
activities in the foreign country where the combined foreign corporation is
incorporated.
Comments from the sponsors. The sponsors of the proposed
legislation made a number of comments concerning the proposed legislation.
Senator Reed stated as follows:
Congress needs to close the inversion loophole to protect
American taxpayers and businesses that pay their fair share for our national
defense, our infrastructure, and the education of our workforce. Our bill would
help put a stop to the corporate shell game that allows some companies to shift
their address abroad for tax purposes while remaining in the U.S. and
increasing the tax burden to American taxpayers. Middle-class families and
small Main Street businesses don't have that option when it comes to paying
taxes.
Large multinational corporations are exploiting the current
system and this is a pragmatic, sensible solution to put a stop to the
inversion trend. If Congress fails to act quickly on inversions it could
seriously erode the corporate tax base and make improving the tax code that
much harder.
Checkmark RIA observation: Of course, the proposed legislation
must make its way through a Republican controlled Congress.
If you would like more details about these or any other aspect
of the law, please do not hesitate to call.
(651) 621-5777, (952) 583-9108, (612) 224-2476, (763)
269-5396
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