Senator Levin Introduces Legislation to Further Limit Corporate Inversions
In reaction, at least in part, to Pfizer’s proposed merger with AstraZeneca (now abandoned), on May 20, 2014, Senator Carl Levin (Democrat, Michigan) introduced the “Stop Corporate Inversions Act of 2014.” The proposed legislation, which would be effective from May 8, 2014 if enacted into law in its current form, would further limit opportunities for a U.S. company to acquire a smaller non-U.S. (foreign) company in order to create a corporate structure with a foreign parent.
Under current law (section 7874), a foreign corporation generally will be treated as a U.S. corporation for U.S. federal income tax purposes if the foreign corporation (i) directly or indirectly acquires "substantially all" of the properties held directly or indirectly by a U.S. corporation, (ii) after the acquisition at least 80 percent of the shares of the foreign corporation (measured by vote or by value) are held, or deemed held, by former shareholders of the U.S. corporation by reason of the former shareholders holding shares in the U.S. corporation and (iii) after the acquisition, the "expanded affiliated group" that includes the foreign corporation does not have substantial business activities in the foreign country in which the foreign corporation is created or organized, when compared to the total business activities of the expanded affiliated group. If a transaction satisfies these three requirements except that less than 80 percent, but at least 60 percent, of the shares of the foreign corporation are held, or deemed held, by former shareholders of the U.S. corporation by reason of the former shareholders holding shares in the U.S. corporation, then the foreign corporation is not treated as a U.S. corporation, but the income and gain recognized by the U.S. corporation (and related persons) in connection with the inversion (inversion gain) is subject to U.S. federal income tax and the U.S. corporation may not claim deductions or current year losses that otherwise would be available to it. Similar rules apply if a foreign corporation acquires substantially all of the properties constituting a trade or business of a domestic partnership.
Senator Levin’s proposed legislation would tighten current law governing inversions in two ways. First, it would lower the ownership threshold for treatment of a foreign corporation as a domestic corporation from 80 percent to 60 percent. Thus, in order to successfully invert, U.S. companies would have to find a larger foreign target (in order that shareholders of the foreign target would own a larger percentage of the combined businesses subsequent to the acquisition).
Senator Levin’s proposed legislation also would create a second, and potentially broader, class of inverted companies: The foreign corporation must (i) acquire substantially all of the properties held directly or indirectly by a domestic corporation, (ii) after the acquisition, former shareholders of the domestic corporation must own more than 50 percent of the shares of the foreign corporation (measured by vote or value), and (iii) the management and control of the expanded affiliated group which includes the foreign corporation must be primarily within the United States and the expanded affiliated group must have significant U.S. business activities. A foreign corporation would be considered managed and controlled in the United States “if substantially 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 of the expanded affiliated group are based primarily located within the United States.”
The Joint Committee on Taxation recently estimated the additional tax revenue that Senator Levin’s proposed legislation would collect if the proposed changes in the law were made permanent. The estimate is approximately $20 billion for the period 2015 to 2024. Currently there appears to be little support for such targeted tax legislation addressing inversions. Congress may have a greater appetite for tightening the anti-inversion rules should it consider comprehensive corporate tax reform in the future.
 The proposed legislation is available at: https://www.govtrack.us/congress/bills/113/s2360/text/. As proposed, Senator Levin’s legislation would expire after two years. The revenue estimate for that period is $791 million.KEYWORD: Corporate Inversions
Tax Insights Blog