Summary of the Stop Corporate Inversions Act of 2014
Tuesday, May 20, 2014
The Stop Corporate Inversions Act of 2014 [PDF] would significantly reduce a tax loophole that allows U.S. companies that merge with foreign companies to reincorporate offshore in lower-tax jurisdictions – known as an “inversion” - to avoid being subject to U.S. tax on their overseas earnings.
Under current U.S. tax law, the merged company is treated as a foreign company if more than 20 percent of the stock of the merged company is owned by stockholders who were not stockholders of the U.S. company or if the merged company has at least 25 percent of its employees, sales and assets where it is incorporated.
The Stop Corporate Inversions Act of 2014 increases the needed percentage change in stock ownership from 20 percent to 50 percent and provides that the merged company will nevertheless continue to be treated as a domestic U.S. company for tax purposes if management and control of the merged company remains in the U.S. and either 25 percent of its employees or sales or assets are located in the U.S.
The bill provides a two year moratorium on inversions that do not meet the stricter tests in the bill so that Congress can consider a long-term solution as part of general corporate tax reform. But we can’t wait for tax reform to stop the bleeding. If we continue to wait, we risk more American companies opting out of the U.S. corporate tax base by reincorporating in lower-tax foreign jurisdictions under the much more permissive current law applying to inversions.
The president’s FY15 budget contains a proposal to close this loophole, and the Stop Corporate Inversions Act largely mirrors that proposal.
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