Washington – Senators Dianne Feinstein (D-Calif.), Dick Durbin (D-Ill.) and Jack Reed (D-R.I.) today introduced two pieces of legislation that aim to stop business practices known as inversions – corporate deals that allow U.S. companies to shift their corporate citizenship from the United States to a low-tax foreign jurisdiction, even while keeping their executives and headquarters in the United States. This is accomplished by merging with a foreign company that can be as little as one-fifth of the size of the U.S. corporation and results in large and permanent tax breaks. Unlike other tax loopholes that can be closed on a year-to-year basis, a tax inversion is a permanent change in a corporation’s structure.
The Stop Corporate Inversions Act (S.2140) would close the tax loophole that allows U.S. companies to acquire smaller foreign companies and move their tax home to a foreign jurisdiction as part of the overall transaction to avoid paying U.S. taxes.
Stop Corporate Inversions Act of 2019
Congress enacted Section 7874 of the Internal Revenue Code in 2004 to discourage U.S. companies from acquiring smaller foreign companies and moving their tax home to a foreign jurisdiction as part of the overall transaction.
Since the provision was enacted in 2004, more than 35 U.S. corporations have inverted, many by acquiring a smaller foreign company to avoid Section 7874. The Stop Corporate Inversions Act of 2017 would close this loophole and, based on a score of similar legislation introduced in 2015, raise nearly $34 billion over ten years:
- The bill would treat a combined foreign corporation as a domestic corporation under two circumstances – (1) if the shareholders of the former U.S. corporation own more than 50 percent of the new combined foreign corporation, or (2) 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 bill would repeal the 60 and 80 percent ownership tests as well as the inversion gain applicable under such circumstances.
- The bill would maintain the foreign substantial business exception under Section 7874 by exempting the affiliated group if it has substantial business activities in the foreign country where the new combined corporation is incorporated.
This legislation is endorsed by: Americans for Tax Fairness