Introduction Of Corporate Anti-Inversion Bill

Floor Speech

INTRODUCTION OF CORPORATE ANTI-INVERSION BILL -- (Extensions of Remarks - June 29, 2007)

* Mr. NEAL of Massachusetts. Madam Speaker, I rise to introduce legislation today to shut down a potential loophole in the anti-inversion provisions of the tax code. As many of my colleagues will remember, I lead the charge back in early 2002 to shut down the so-called ``corporate expatriate'' loophole. Corporate expatriates trade in their U.S. citizenship for citizenship in certain no-tax or low-tax havens through reincorporation or a corporate ``inversion.'' These corporate expatriates often have little or no presence in these haven jurisdictions; some merely rent a mailbox to establish their new headquarters.

* Following the attacks of September 11, 2001, some aggressive tax advisors were telling their clients that the climate was ripe for inversions as most stock prices were depressed. The only tax paid when a corporation departed was a tax on the gain of the stock or assets transferred to the new foreign parent company. As one tax advisor put it, ``Maybe patriotism needs to take a back seat to improved corporate profits.''

* Despite the outcry from shareholders, taxpayers, and many of us in Congress, the leadership of the prior Congress fought enactment of a loophole closer. It was not until late in 2004, in the American Jobs Creation Act, that corporate expatriation was finally put to a halt. That bill used the same formula of my original bill--simply stating that if almost all of the shareholders of the new foreign company were the same as under the old American company and if the company had little real business in the host foreign country, then the corporate expatriate would be taxed as if it were still a U.S. company.

* That new law put a chill on the market for corporate expatriation. However, earlier this year, one American company stated it was moving the headquarters of the operation to a foreign country with no corporate income tax. The company is not really changing its residency. Many have speculated that this is really a two-step process: move some administrative functions abroad to establish a minimal presence, and then give up U.S. corporate citizenship.

* I think this would circumvent the intent of the original law and that is why I am filing legislation today to close that loophole. My bill would exclude any management or administrative functions, including the corporate headquarters, from the calculation of what constitutes substantial business activities in the foreign country. I am sure that many CEOs would not think it too much a sacrifice to relocate their office to the sunnier climes of some of these havens and thereby shave millions off of the company's tax bill. I urge my colleagues to support my legislation to prevent this type of tax avoidance.

* I would also add that I do not view these events in a vacuum. Clearly, this Congress needs to look at more incentives to keep American companies and jobs here. I have discussed with Chairman Rangel holding hearings on how our tax code treats both domestic and foreign sources of income to make sure American companies can successfully compete in a global market. However, until such changes are made, I will continue my efforts to prevent ``self-help'' maneuvers, such as the fiction of corporate expatriation.

* A summary of my bill follows:

BILL SUMMARY
Present law

Section 801 of the American Jobs Creation Act of 2004 (AJCA) added section 7874 to the Internal Revenue Code. Section 7874 provides certain rules designed to remove incentives for corporations to engage in inversion transactions. However, the anti-inversion rules do not apply if the expanded affiliated group (EAG) of the corporation has business activities in the foreign country in which, or under the laws of which, the acquiring foreign entity was created or organized and such business activities are substantial when compared to the total business activities of the EAG. (For purposes of section 7874, the EAG is similar to the affiliated group permitted to file a consolidated federal income tax return, except that companies are considered to be in the expanded affiliated group if they are more than 50 percent owned by the common parent or other members (the consolidation rules required 80 percent) and foreign corporations may be included in the expanded affiliated group.) In explaining the reason for this legislative change, the ``Blue Book'' compiled by Joint Tax states, ``The Congress believed that inversion transactions resulting in minimal presence in a foreign country of incorporation were a means of avoiding U.S. tax and should be curtailed.'' Staff of Joint Comm. on Taxation, General Explanation of Tax Legislation Enacted in the 108th Congress, at 343 (Comm. Print JCS-5-05).

On June 5, 2006, the Department of the Treasury and the Internal Revenue Service issued Temporary and Proposed Regulations that, among other things, provide certain rules regarding the substantial activities test (T.D. 9265). The regulations provide both an all-facts-and-circumstances test and a bright-line safe harbor test to determine whether an EAG has substantial business activities in the acquiring foreign entity's country of incorporation when compared to the total business activities of the EAG. Under the general rule of the all-facts-and-circumstances test, the determination of whether the EAG has substantial business activities in the relevant foreign country, when compared to the total business activities of the EAG, is based on an analysis of all the facts and circumstances of each case. The regulations set forth a non-exclusive list of factors to be considered in the analysis. The weight given to any factor depends on the particular circumstances. The listed factors include, among other factors, the EAG's local employee headcount and payroll, property, and sales; the EAG's historical presence in the foreign country; its management activities in the country; and the strategic importance to the EAG as a whole of the business activities in that country.

The regulations state that the presence or absence of any factor, or any particular number of factors, in the list is not determinative, and that there is no minimum percentage of the group's total employee headcount, payroll, assets, or sales that must be shown to be in the foreign country.

The safe harbor test is satisfied if the EAG satisfies three conditions, relating to employees, assets, and sales. The first condition is that the group employees based in the foreign country account for at least 10 percent (by headcount and compensation) of total group employees. The second condition is that the total value of the group assets located in the foreign country represents at least 10 percent of the total value of all group assets. The third condition is that the group sales made in the foreign country accounts for at least 10 percent of total group sales. The bill

The bill provides that for purposes of the substantial activities test of section 7874, any management or administrative activities, including the location of any corporate headquarters, taking place in the foreign country in which, or under the law of which, the inverted entity is created or organized shall not be taken into account as business activities. Under the bill, for example, if a U.S. company inverts to country X, and its management is located in country X or performs much of its management activities there, the activities of its management in country X are not taken into account for purposes of determining whether the activities of the EAG in country X are substantial when compared to the total worldwide business activities of the EAG. On the other hand, under that example if any management activities of the EAG take place outside of country X, such management activities are taken into account in applying the substantial activities test.

The bill modifies the statutory substantial business activities test, and accordingly limits the application of both the all-facts-and-circumstances test and the safe harbor of the regulations.

Under the bill, the term ``management activities'' includes any management activities, and therefore extends beyond top corporate management. For example, it would include management activities relating to operational units. Similarly, the term ``administrative activities'' includes departments whose function is essentially administrative in nature, such as accounting, as well as administrative activities relating to or performed by operational units.

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