Sens. Durbin and Reed, Reps. Levin and Doggett Introduce Legislation to Curb Corporate Tax Inversions

Jan 20, 2015

WASHINGTON – Senate Minority Whip Dick Durbin (D-IL), House Ways and Means Committee Ranking Member Sander Levin (D-MI), Senator Jack Reed (D-RI), and Rep. Lloyd Doggett (D-TX)  today introduced legislation to tighten restrictions on corporate tax inversions, limiting the ability of American companies to lower their U.S. taxes by combining with a smaller foreign business and moving their tax address overseas.

The legislation would save the U.S. nearly $34 billion in revenue, according to a recent estimate from the Joint Committee on Taxation.

Co-sponsors of the Durbin-Reed bill include Senators Sheldon Whitehouse (D-RI), Elizabeth Warren (D-MA), Mazie Hirono (D-HI), and Al Franken (D-MN). The House bill was originally introduced in May by Rep. Levin and three dozen other Democrats.

“When corporations invert, they renounce their American citizenship and don’t pay their fair share of taxes—leaving the rest of us to pick up the tab. That isn’t right,” Sen. Durbin said. “Today, we are putting these corporate tax deserters on notice: we are not going to stand by while they game the tax code and avoid their responsibility to our country. It’s time for Congress to act on a legislative solution to crack down on companies that are turning their back on American taxpayers.”

“This loophole illustrates perfectly why so many Americans believe that big corporations play by a different set of rules than everyone else,” said Rep. Levin. “This is clearly a problem that is not going away – it cannot wait for tax reform. The Treasury Department’s proposal was an important step, but legislative action is necessary to stop the ongoing flood of inversions.”

“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,” said Sen. Reed. “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.”  

“Corporations that renounce their citizenship not only invert their business operations but pervert our tax laws,” said Rep. Doggett. “This bill supports American companies that are paying their fair share and helps provide small businesses a more level playing field.”

The Stop Corporate Inversions Act:

  • 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% or less of the new combined corporation. This legislation would increase that threshold to 50%.
  • 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 legislation would be effective for any inversion transactions completed after May 8, 2014, when the House bill was originally introduced.

Background:

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.

The Treasury Department released a notice in September aimed at reducing the key tax benefits of inversions.

###