Increasing problem: There has been a rapid increase in the number of U.S.-based multinational companies renouncing their citizenship by moving their addresses overseas to avoid paying U.S. taxes. Congress enacted Section 7874 of the Internal Revenue Code in 2004 as a way to discourage U.S. companies from acquiring smaller foreign companies and moving their tax home to a foreign jurisdiction to dodge U.S. taxes. Since the provision was enacted in 2004, there have been approximately 40 corporate inversions, according to Bloomberg.
Costing taxpayers: Corporate inversions are costing the U.S. tax base billions of dollars in lost revenue, leaving ordinary Americans to foot the bill. The Joint Committee on Taxation estimates that House legislation to stop corporate inversions would save the U.S. tax base nearly $41 billion over 10 years.
Inverters continue to reap benefits: These companies continue to benefit from being headquartered in the U.S., with our robust financial markets, protection of intellectual property rights, support of research and development, along with our stable communities and wealth of educated workers.
Requiring immediate action: As we work diligently towards comprehensive tax reform, we need to enact legislation now to prevent companies from simply changing their tax domicile to avoid paying U.S. taxes.
On January 20, 2015, then-Ways and Means Committee Ranking Member Sander Levin and Committee member Lloyd Doggett introduced the Stop Corporate Inversions Act of 2015, which broadly follows the proposal laid out by the President in his FY2015 budget. Assistant Democratic Leader Senator Dick Durbin and Senator Jack Reed introduced companion legislation in the Senate. The House bill was originally introduced on May 20, 2014.
The legislation closes a loophole used by companies to lower U.S. taxes. Current law prohibits an inversion – for tax purposes – if the shareholders of the foreign company own 20 percent or less of the new combined corporation. This legislation would increase that threshold to 50 percent.
Regardless of the percentage ownership in the new combined corporation, if the affiliated group that includes the combined foreign corporation is managed and controlled in the United States and engages in significant domestic business activities in the United States, the U.S. corporation cannot invert under the legislation.
The legislation would repeal the 60%-80% ownership test and the “inversion gain” applicable to such stock ownership percentages.
As under current law, the legislation would maintain the substantial business exception under Section 7874 if the combined foreign corporation has substantial business activities in the foreign country where the combined entity is incorporated.
The bill would be permanent and apply to inversions completed after May 8, 2014.
- H.R. 415: Stop Corporate Inversions Act of 2015
- H.R. 4985: Stop Corporate Expatriation and Invest in America's Infrastructure Act of 2014
- Joint Committee on Taxation score for H.R. 415 (UPDATED July 2015)