WASHINGTON – A group of 14 senators today introduced legislation to tighten rules on corporate tax avoidance through “inversion,” the practice of reincorporating offshore to avoid paying U.S. taxes.
The Stop Corporate Inversions Act of 2014 is designed to prevent the loss of billions of dollars in revenue through a flood of inversions, a loss that would add either to the deficit or to the tax burden of American taxpayers. The bill would effectively impose a two-year moratorium on inversions, the practice of shifting a corporation’s tax residence overseas through acquisition of an offshore company to avoid paying U.S. income taxes.
“Our current tax code unnecessarily encourages companies to shift their tax address offshore, eroding the U.S. tax base and endangering American jobs. I’m proud to join Senator Levin in this effort to close this loophole and protect Americans workers,” said Sen. Ben Cardin, D-Md., a member of the Finance Committee. “In the longer term, I look forward to redoubling our efforts on broader tax reform legislation that can fix our corporate tax code and make it more competitive.”
“These transactions are about tax avoidance, plain and simple,” said Sen. Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations and the bill’s lead sponsor. “The Treasury is bleeding red ink, and we can’t wait for comprehensive tax reform to stop the bleeding. Our legislation would clamp down on this loophole to prevent corporations from shifting their tax burden onto their competitors and average Americans while Congress is considering comprehensive tax reform.”
“Mergers should be driven by economics, not tax avoidance,” said Sen. Sheldon Whitehouse, D-R.I. “When profitable corporations employ cynical strategies to avoid taxes, honest taxpayers pay the price. That’s why I’m pleased to join Senator Levin in introducing this common sense tax fairness bill.”
“This bill is a necessary step to crack down on companies that use gimmicks to avoid paying taxes,” said Sen. Dianne Feinstein, D-Calif. “What we need is a complete overhaul of the corporate tax code. Until that happens, Congress must act to prevent companies from exploiting loopholes that unfairly lower their tax bills.”
“This is about leveling the playing field and rooting out flagrant tax abuse in our system that could lead to billions of dollars of lost revenue,” said Sen. Tim Kaine, D-Va. “In order to fully restore budget certainty, we need to look at abuses in the tax code as much as spending. The fact that companies can change their tax liability to low-tax jurisdictions on paper while maintaining operations and ownership in the U.S. is unacceptable and I’m pleased to join my colleagues to introduce this important fix.”
“It’s simply unfair that while families in Hawaii and across our country pay their taxes each year, big corporations use loopholes to avoid paying theirs,” said Sen. Brian Schatz, D-Hawaii. “It’s time to close these loopholes and make big corporations pay their fair share like everyone else.”
“Our country deserves a tax code that is simple and fair,” said Sen. Mazie Hirono, D-Hawaii. “The average family in the U.S. pays over 18 percent in federal taxes. However, by using gimmicks and loopholes like inversions, major corporations pay an average of 13 percent. That’s not fair to average working families. The Stop Corporate Inversions Act of 2014 will save billions of dollars that can in turn be used for investments in education, infrastructure, and research and development. These are investments that we all benefit from – American families, small businesses, large corporations – and they make our economy stronger and our country better.”
Additional cosponsors are Sen. Jay Rockefeller, D-W.Va.; Sen. Barbara Boxer, D-Calif.; Sen. Bill Nelson, D-Fla.; Sen. Tim Johnson, D-S.D; Sen. Angus King, I-Maine; Sen. Debbie Stabenow, D-Mich.; and Sen. Elizabeth Warren, D-Mass.
The bill is broadly similar to a proposal in President Obama’s 2015 budget submission. Under current law, U.S. companies can “invert” and avoid paying U.S. income taxes if a merger transfers just 20 percent of its stock to shareholders of an offshore company. The bill introduced today would raise that threshold to 50 percent, so that if the majority of a company’s stock remains in the hands of the U.S. company’s shareholders, it is treated as a U.S. company for tax purposes. It also would bar companies from shifting tax residence offshore if their management and control and significant business operations remain in the United States.
The two-year moratorium is achieved through a two-year sunset provision designed to provide time for Congress to work on bipartisan comprehensive corporate tax reform.
Companion legislation is being introduced in the House of Representatives by Rep. Sander Levin, D-Mich., the ranking member on the House Ways and Means Committee.
The Stop Corporate Inversions Act of 2014
The Stop Corporate Inversions Act of 2014 would significantly reduce a tax loophole that allows U.S. companies that merge with foreign companies to reincorporate offshore in lower-tax jurisdictions – known as an “inversion” – to avoid being subject to U.S. tax on their overseas earnings.
Under current U.S. tax law, the merged company is treated as a foreign company if more than 20 percent of the stock of the merged company is owned by stockholders who were not stockholders of the U.S. company or if the merged company has at least 25 percent of its employees, sales and assets where it is incorporated.
The Stop Corporate Inversions Act of 2014 increases the needed percentage change in stock ownership from 20 percent to 50 percent and provides that the merged company will nevertheless continue to be treated as a domestic U.S. company for tax purposes if management and control of the merged company remains in the United States and either 25 percent of its employees or sales or assets are located in the United States.
The bill provides a two year moratorium on inversions that do not meet the stricter tests in the bill so that Congress can consider a long-term solution as part of general corporate tax reform. But we can’t wait for tax reform to stop the bleeding. If we continue to wait, we risk more American companies opting out of the U.S. corporate tax base by reincorporating in lower-tax foreign jurisdictions under the much more permissive current law applying to inversions.
The president’s FY15 budget contains a proposal to close this loophole, and the Stop Corporate Inversions Act largely mirrors that proposal.
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