September 8, 2014
This ominous sounding legislation seeks to eliminate loopholes that permit corporations to avoid paying U.S. taxes. One expert estimated that $17 billion in tax revenue could be lost if Congress fails to close the loopholes. 160 Cong. Rec. S5090-01 (July 30, 2014).
In introducing the bill, Sen. Carl Levin noted that the rules regarding corporate inversions were tightened in 2004, but loopholes remain. 160 Cong. Rec. S3187-01. He further remarked:
Essentially the problem we have today is that a U.S.-based multinational can file a change-of-address card with the IRS simply by acquiring an offshore company that is much smaller than the U.S. company. Our bill would ensure that any inversion would meet a much more stringent test.
Under current law, companies can pull off an inversion with a fraction of their stock, just over 20 percent, in the hands of the new stockholders overseas. Our bill would raise that threshold to 50 percent or more. In addition, it would stop tax-avoiding inversions in cases where management and control remain in the United States.
160 Cong. Rec. S3187-01 (May 20, 2014). This issue caught my attention when someone told me he was planning to boycott my favorite pharmacy chain because it was in the process of effecting a corporate inversion, thereby avoiding U.S. taxes. He recommended that I also boycott this company. Fortunately, it appears the pharmacy chain’s plans to expatriate have terminated, and eliminated my friend’s boycott threat.
I wanted to learn more about corporate inversions, starting with the basics. My colleague Craig Eastland wrote about the Inversion Excursion recently. He explained what corporate inversions are and addressed research of securities filings on the topic. I highly recommend this post; it is quite informative and you will understand this post better. To start, I ran the following global search across all federal jurisdictions on WestlawNext:
INVERTED CORPORATION OR CORPORATE INVERSION
I started by reviewing the currently pending legislation and prior legislation, as well as secondary sources. There are a number of articles that discuss the origin, purpose, evolution and regulation of corporate inversions. For a closer look at the legislative intent behind the legislation, I ran the same search string in the Legislative History content set.
I quickly discovered that Sen. Carl Levin, Sen. Max Baucus, and Rep. Lloyd Doggett have been working since 2002 to stop the bleeding with tax reform. Take a look at Sen. Levin’s remarks upon introduction of the 2013 and 2014 bills. As indicated above, anti-inversion reform was enacted in 2004 by The American Jobs Creation Act of 2004 (P.L. 108-357). The law enacted section 7874 of the Internal Revenue Code.
The Stop Corporate Inversions Act of 2014 was introduced by Senator Carl Levin in the Senate (S. 2360) and Representative Sander Levin in the House (H.R. 4679) on May 20, 2014. The 2014 legislation would impose a 2 year moratorium on corporate inversions used to avoid U.S. taxes. Senator Levin has called this legislation “first aid” for the tax code.
Since introduction of the Stop Corporate Inversions Act in May 2014, additional legislation has been introduced. The Stop Corporate Expatriation and Invest in America’s Infrastructure Act of 2014, H.R. 4985, was introduced on June 26. This act would not only close the loophole by amending the tax code, but also redirect the saved revenue to highway projects. The No Federal Contracts for Corporate Deserters Act of 2014, S. 2704 and H.R. 5278, was introduced by Sen. Carl Levin and Rep. Rosa DeLauro, on July 30, 2014. This bill prohibits the award of federal contracts to inverted domestic corporations.
Tracking Pending Legislation
One thing that has been interesting is how much action has taken place on this topic since May. The original bill was sent to committee, but other bills have been introduced on the same subject—reducing or eliminating corporate inversions. I set up a couple of WestClips in my Alerts on WestlawNext so I can keep track of activity relating to the previously mentioned bills and any newly proposed bills.
I set up a daily search in Legislative History content: the Congressional Record, Federal Proposed & Enacted Legislation, U.S. Code Congressional & Administrative News, Legislative History – United States Code, U.S. Congressional Testimony, and U.S. Political Transcripts. I used the following search terms:
CORPORAT! /6 INVERSION INVERTED TAX-HAVEN EXPATRIAT!
I also set up a WestClip in secondary sources. To simplify the review process, I created a Newsletter to combine the results of both alerts into a single update sent to my email.