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Blog: Targeting Companies That Move Overseas to Dodge Taxes

May 23, 2014 | By Carolyn Burstein, NETWORK Communications Fellow

Corporate tax-dodging deals known as “inversions,” in which a U.S. multinational shifts its tax domicile to a lower-tax country, would be restricted for two years under legislation proposed in both houses of Congress on May 19, 2014. Representative Sander Levin and Senator Carl Levin, brothers from Michigan, proposed both bills, each of which had more than a dozen co-sponsors, all Democrats. The rationale behind the two-year moratorium would give Congress time to pursue broad changes in the corporate tax code. As Senator Ben Cardin (D-MD) said, “I look forward to redoubling our efforts on broader tax reform legislation that can fix our corporate tax code and make it more competitive.”

How does “inversion” work? Under current tax law, companies can create the deal of inversion and move overseas if foreign shareholders own 20% or more of their stock. Even if most of the business activity and corporate headquarters of the “new” company are in the U.S., the company would still be a “foreign” corporation for tax purposes. Many U.S. companies climb the 20% barrier by acquiring a foreign rival. The Levins’ bills would increase the threshold to 50% for two years, a threshold much more difficult to achieve. This proposal mirrors one in the President’s 2015 budget submission, which the Treasury estimates would raise $17 billion in revenue over the next decade.

Once a corporation is foreign, any profits earned in the U.S. are subject to U.S. taxes, but offshore profits are not. According to Citizens for Tax Justice, inversion makes it easier for a corporation to avoid U.S. taxes because corporate inversions are often followed by “earnings-stripping,” which makes U.S. profits appear, on paper, to be earned offshore. Corporations load the American part of the company with debt owed to the foreign part of the company, and the interest payments on the debt are tax deductible, thus reducing American profits “on paper.”

“These transactions are about tax avoidance, plain and simple,” said Senator Carl Levin (D-MI) chairman of the Senate Permanent Subcommittee on Investigations, who is the bill’s lead sponsor, in introducing the bill in the Senate. “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.” Tim Kaine (D-VA) also stated: “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.”

A splurge of deals resembling those of Pfizer (who recently made a bid to acquire the British pharmaceutical Astra-Zeneca, but was recently rebuffed and made it clear the company would not pursue a hostile takeover)