Senator Robert Casey (D-PA) asked Treasury what actions short of legislation could be taken to stop corporate inversions. In a letter to Treasury Secretary Jacob Lew, he asked how existing regulations and tax laws could be improved in order to better target inversion transactions motivated primarily by tax considerations, rather than inversions motivated solely by business considerations. Specifically, the Senator wants to know what Treasury and the Internal Revenue Service can do right now within existing authorities to more effectively enforce existing anti-inversion penalties. He also asks what additional resources, if any, would be required to support more effective enforcement of current regulations.
Many proposals to address the inversion trend, including a proposal in the Administration’s Fiscal Year 2015 Budget proposals, would enact or amend tax domicile rules based on whether a company’s management and control is based in the United States, or the company maintains significant business activities in the United States. Senator Casey wants to know how easily enforceable these proposals would be, and what additional resources, if any, would be needed to ensure fair, transparent and effective enforcement.
While an anti-inversion provision has been part of the Internal Revenue Code since 2004, experience has shown that this provision insufficiently deters inversion given the large tax rate and other tax disparities between the United States and the countries to which formerly U.S.-based multinationals have relocated.
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. One legislative vehicle is available for Congress right now. It is the Stop Corporate Inversions Act, S. 2360, introduced by Senator Carl Levin (D-Mich.). The measure would raise the 20 percent 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. The bill would also bar companies from shifting their tax residence offshore if their management and control and significant business operations remain in the U.S. There is a companion bill in the House, H.R. 4679, introduced by Rep. Sandy Levin (D-MI).