Bill would clamp down on offshore tax shelters

Benjamin Cardin
Benjamin Cardin

WASHINGTON, D.C. (Press Release) – A group of 14 senators on Tuesday, May 20,  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, Democrat-Maryland., 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-Rhode Island. “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-California “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-Virginia. “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 on Tuesday 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.

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Companion legislation was introduced in the House of Representatives by Rep. Sander Levin, D-Mich., the ranking member on the House Ways and Means Committee.  In a news release, U.S. Rep. Jan Schakowsky, D-Ill., reported the following:

 A group of nearly a dozen House Democrats today introduced legislation to tighten restrictions on corporate tax inversions, limiting the ability of American companies to avoid U.S. taxation by combining with a smaller foreign business and moving their tax domicile overseas. The House legislation and companion Senate legislation largely mirror the inversion proposal included in the President’s FY 2015 budget.

Co-sponsors of the legislation include Ways and Means Committee Ranking Member Sandy Levin (D-MI), Rep. Jan Schakowsky (D-IL), Rep. Charles Rangel (D-NY), Rep. Jim McDermott (D-WA), Rep. Richard Neal (D-MA), Rep. Lloyd Doggett (D-TX), Rep. John Larson (D-CT), Rep. Danny Davis (D-CT), Budget Committee Ranking Member Chris Van Hollen (D-MD) and Rep. Rosa DeLauro (D-CT).

There have been more than 40 corporate inversions in the last decade, costing the U.S. tax base billions of dollars. The Treasury Department estimates that the President’s FY 2015 budget proposal on inversions would raise $17 billion in revenue over the next decade.

Under current law, a corporate inversion will not be respected for U.S. tax purposes if 80 percent or more of the new combined corporation (incorporated offshore) is owned by historic shareholders of the U.S. corporation. The bill would make it harder for U.S. companies to invert by reducing this threshold from 80 percent or more to more than half. This would effectively require U.S. companies to merge with foreign companies that are roughly equal or larger in size in order to move their location for tax purposes outside the United States and, thereby, escape U.S. tax.

The legislation would apply to inversions completed after May 8, 2014.

“Corporate inversions are a growing problem, costing the U.S. tax base billions of dollars and undermining vital domestic investments,” said Ranking Member Levin. “This egregious practice requires immediate action. This legislation would stop American companies from avoiding U.S. taxes simply by purchasing a smaller foreign company.”

“U.S. Corporations benefit from tax-payer funded research, our transportation infrastructure, our top-rate education system and the productive employees it produces, and our world-leading economy,” said Rep. Schakowsky. “Yet many of these corporations have used inversions to avoid their fair share of U.S. taxes – taxes that pay for the investments that have helped them profit and thrive. This legislation will help address that issue and ensure that the corporate giants supported by the U.S. economy meet their tax obligations.”

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Preceding provided Senator Ben Cardin, D-Maryland, and Rep. Jan Schakowsky, D-Illinois