WASHINGTON, DC – U.S. Senators Dick Durbin (D-IL) and Jack Reed (D-RI) today introduced two pieces of legislation that aim to stop business practices known as inversions – corporate deals that allow U.S. companies to shift their corporate citizenship from the United States to a low-tax foreign jurisdiction, even while keeping their executives and headquarters in the United States. This is accomplished by merging with a foreign company that can be as little as one-fifth of the size of the U.S. corporation and results in large and permanent tax breaks. Unlike other tax loopholes that can be closed on a year-to-year basis, a tax inversion is a permanent change in a corporation’s structure.
• The Stop Corporate Inversions Act would close the tax loophole that allows U.S. companies to acquire smaller foreign companies and move their tax home to a foreign jurisdiction as part of the overall transaction to avoid paying U.S. taxes.
• The American Business for American Companies Act would extend the year-to-year government-wide ban on federal contracts for inverted corporations by moving it out of the annual appropriations process and into permanent law.
“Inversion loopholes allow American companies to skirt tax obligations, and it’s just plain wrong. These companies benefit from America, but when it comes to their taxes they’d rather scheme their way out of paying their fair share. That leaves families and small businesses behind, and it has to end,” Sen. Durbin said.
“Congress must close the inversion loophole to protect American taxpayers and businesses that pay their fair share and ensure we can meet our national defense, infrastructure, and workforce needs. This legislation would end the corporate shell game that allows some companies to shift their address abroad in order to reduce their taxes while remaining in the U.S. and increasing the tax burden to American taxpayers,” said Sen. Reed.
Along with Durbin and Reed, U.S. Senators Sherrod Brown (D-OH), Tammy Baldwin (D-WI), Sheldon Whitehouse (D-RI), Jeff Merkley (D-OR), Elizabeth Warren (D-MA), Dianne Feinstein (D-CA), and Tammy Duckworth (D-IL) are cosponsors of the Stop Corporate Inversions Act.
The American Business for American Companies Act is also cosponsored by Senators Sheldon Whitehouse (D-RI) and Tammy Duckworth (D-IL).
Today, U.S. Representative Rosa DeLauro (D-CT-03) introduced the House companion version of the American Business for American Companies Act.
“We cannot continue to allow corporations to reap the benefits this country offers while claiming to be in another country when their taxes are due,” said Rep. DeLauro. “Those corporations are cheating the American people out of revenue that would make a real difference in the lives of children and families—all so that they can dodge taxes and enrich corporate executives. That is wrong, and Congress needs to step up and close this corporate tax loophole immediately.”
Stop Corporate Inversions Act of 2019
Congress enacted Section 7874 of the Internal Revenue Code in 2004 to discourage U.S. companies from acquiring smaller foreign companies and moving their tax home to a foreign jurisdiction as part of the overall transaction.
Since the provision was enacted in 2004, more than 35 U.S. corporations have inverted, many by acquiring a smaller foreign company to avoid Section 7874. The Stop Corporate Inversions Act of 2017 would close this loophole and, based on a score of similar legislation introduced in 2015, raise nearly $34 billion over ten years:
• The bill would treat a combined foreign corporation as a domestic corporation under two circumstances – (1) if the shareholders of the former U.S. corporation own more than 50 percent of the new combined foreign corporation, or (2) 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 bill would repeal the 60 and 80 percent ownership tests as well as the inversion gain applicable under such circumstances.
• The bill would maintain the foreign substantial business exception under Section 7874 by exempting the affiliated group if it has substantial business activities in the foreign country where the new combined corporation is incorporated.
American Business for American Companies Act
The American Business for American Companies Act would extend the year-to-year ban by moving it out of the annual appropriations process and into permanent law.
- The bill maintains the exception in existing law allowing an agency head to waive these requirements if doing so is in the interest of national security. It also eliminates loopholes in the current law that have allowed inverted corporations to bid for, and win, federal contracts, despite the ban currently in place.
- The bill would close a loophole used by dozens of companies in recent years to move their tax address overseas and avoid paying U.S. taxes by purchasing a smaller foreign company while still qualifying for taxpayer-funded government contracts.
- The legislation also provides authority for the agencies to prevent subcontracts with inverted corporations and joint ventures that use subcontracts and joint ventures to evade the ban.
- The bill also covers task and delivery orders. Under the current ban, some inverted corporations remain eligible for billions in new federal spending for years after inverting because of indefinite delivery contracts that allow them to continue to bid for, and win, projects in successive rounds. These contracts are typically structured with a government option to renew, and this bill would ensure that the new business goes to companies that don’t use the tax inversion gimmick, rather than rewarding companies that move overseas.