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The Resource for the Global Finance Profession

Legislation Seeks to Limit Corporate Inversion: What To Know

  • By Konstantine Kastens, AFP Public Policy Analyst
  • Published: 2014-05-23

U.S. Congressional Democrats in both the House and Senate unveiled legislation this week that would make it more difficult for U.S. businesses to avoid domestic tax exposure by shifting their headquarters outside United States tax jurisdiction through a foreign firm merger. Since 2011, 14 firms have inverted their tax domicile to lower-tax countries to escape the 35 percent statutory U.S. corporate tax rate.

Most recently, in what would have created the largest global pharmaceutical company, Pfizer Inc. sought unsuccessfully to merge with AstraZeneca Plc and reestablish its headquarters in the UK, where the corporate tax rate is 21 percent. In response to the growing trend among companies, Sen. Carl Levin (D-MI) introduced the Stop Corporate Inversion Act in the Senate on Tuesday. A House counterpart version was subsequently introduced by Rep. Sander Levin (D-MI), ranking member on the House Ways and Means Committee.

What does it do?

For a U.S.-based corporation merged with a foreign firm not to be subject to U.S. tax treatment, the legislation would:

•    Raise the minimum required threshold of foreign shareholder ownership from current law 20 percent to at least 50 percent.

•    Require the following be located outside of U.S. borders:

  • “Management and control” of company: Defined as, “all of the executive officers and senior management of the expanded affiliated group who exercise day-to-day responsibility for making decisions involving strategic, financial and operational policies.”
  • Over 25 percent of employees, revenue income or assets.

Effective date of the bill begins May 8, 2014 (applied retroactively) and—only in Senate version—continues for a two-year period (under the premise that broader a tax bill be enacted within that period).

What’s next?

The bills will be referred to the House Ways and Means and Senate Finance committees for consideration and a presumptive mark-up.

Will it succeed?

Not likely. As a narrow-focused tax bill, it’s most feasible path would be as an attached amendment to broader tax overhaul legislation. With that prospect improbable in the current Congress, chances of the legislative success are grim. Moreover, the legislation’s chief leader Sen. Carl Levin (D-MI) retires from the Senate at the end of 2014, possibly reducing political momentum.

As of yet, the legislation has no Republican support in Congress. During a floor speech, Sen. Orrin Hatch, the ranking member of the Senate Finance Committee, told the chamber he would not support legislation that further restricts corporate inversion, but rather aim for comprehensive framework that includes making “the United States a more desirable location to headquarter one’s business.”

Senate Finance Chairman Ron Wyden supports increasing the amount of merged company stock that must be held by foreign shareholders to 50 percent, but has neither yet co-sponsored nor publicly supported the Levin bill. Although Wyden has not signaled a scheduled mark-up of the Levin bill, he expressed interest in future hearings addressing the matter.

On the House side, key Republican support is also lacking. In response to the Levin bill, House Ways and Means Chairman Dave Camp (R-MI) stated his general position is not to tighten regulation, but instead to pass comprehensive tax legislation that brings corporate tax rates to where “there is not an incentive to go overseas in the first place.”

Should the legislation not succeed, Sen. Carl Levin (D-MI) commented that he would seek to attach the language as an amendment to a separate bill taken up.  The May 8, 2014 starting date is meant to establish a placeholder date for future versions of the legislation to retroactively take effect – thereby intending to signal companies against future inversion attempts.

The White House offered similar language to the Levin bill in the 2015 budget proposal – with the Treasury Department pointing to a $17 billion revenue increase over a 10-year period.

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