Congress Turns Tax World Upside Down with New Focus on Corporate Inversions

by K&L Gates LLP

Interest in corporate inversions has revived on Capitol Hill. Recent publicity surrounding pending deals has triggered comments and legislative proposals from tax writers and other members and stirred up the debate about international tax reform. This alert provides a brief overview of inversions, including why some consider it a loophole; describes what policymakers are doing to address the practice; and considers the prospects for any meaningful action by Congress.

What is a corporate inversion and why do some consider it a loophole?

In general, a corporate inversion is a transaction where a U.S. corporation becomes a subsidiary of a foreign entity; after the transaction, the former shareholders of the U.S. corporation hold (by reason of the stock they held in the U.S. corporation) 80 percent or more (by vote or value) of the stock of the foreign entity; and the foreign entity does not have substantial business activities in the country in which it was created, compared to its worldwide business activities. Put simply, an inversion occurs when a U.S. company is acquired by a foreign company, the owners of the old U.S. company have at least 80 percent control of the foreign company, and most of the business activity occurs somewhere other than in the country where the foreign parent is organized.

Under current anti-inversion rules enacted in 2004, the new top-tier foreign corporation is treated like a U.S. domestic corporation for all U.S. federal tax purposes. To avoid being considered a domestic company, transactions are structured so the continuity of ownership is less than 80 percent. Current rules limit certain tax benefits if the continuity of ownership is between 60 percent and 80 percent, but the foreign status of the entity is respected for tax purposes.

Before the transaction, the worldwide earnings of the old U.S. company were subject to U.S. tax. After the transaction, assuming the 80 percent continuity test is not met, only the income earned in the U.S. is subject to U.S. tax. In the case of an inverted U.S. multinational corporation with substantial non-U.S. income, this could significantly reduce U.S. taxable income subject to higher U.S. tax rates, while significantly reducing worldwide tax liability because most revenues would be taxed at lower tax rates throughout the rest of the world on a territorial, not worldwide, basis.

This potential for significant tax savings has caused some to call corporate inversions a tax loophole, especially when the primary motivation for a transaction appears to be tax savings, and business operations, including management and control, are largely unaffected by the restructuring. Regardless, it is generally agreed that there is nothing illegal about inversions under the current U.S. tax system.

What does Congress want to do?

Reactions on Capitol Hill to the recent flurry of inversion activity are mixed.  Some members want to take targeted action right away, while others maintain this is an issue best left for comprehensive tax reform down the road.

Senate Finance Committee Chairman Ron Wyden (D-OR) has straddled both approaches.  On May 8, 2014, he put companies considering inversion transactions on notice, saying he wanted to take some “short-term steps” to combat inversions. In a Wall Street Journal op-ed the next day, Chairman Wyden articulated his plan for a retroactive approach:  “While they may not be breaking U.S. tax laws, many of these companies are navigating a loophole in America’s broken and dysfunctional tax code.... Legal or not, this loophole must be plugged.” For all inversion transactions taking place from May 8, 2014 forward, Chairman Wyden would require that the foreign parent own at least 50 percent (compared to the current 20 percent) of the inverted corporation. He further stated in the op-ed that he is “committed to making this happen and including changes in the inversion rules as part of a tax overhaul.” After Senator Carl Levin (D-MI) and House Ways and Means Committee Ranking Member Sander Levin (D-MI) introduced their respective anti-inversion bills on May 20, Chairman Wyden reiterated that he thinks this issue is best addressed as part of comprehensive tax reform rather than a piecemeal provision.

Following the announcement of another inversion transaction in June, Chairman Wyden announced his concern that the America should not be “part of a race to the bottom” and that “gaming the system” would not allow U.S. companies to avoid paying taxes. Chairman Wyden followed up on these comments by noting that inversions illustrate that the U.S. corporate tax rate isn’t very efficient and that the next 15-month window is critical to passing corporate tax reform.

Senate Finance Committee Ranking Member Orrin Hatch (R-UT) has made it clear he thinks this is an issue to be considered as part of a tax reform effort, and that the focus should be on the carrot, not the stick. Elaborating on this in a floor statement, he said there are two ways to address the problem of inversions: “The first way is to make it more difficult for a U.S. corporation to invert.… The second way is to make the United States a more desirable location to headquarter one’s business. I believe the latter is the better way.”

Despite these differences, both Chairman Wyden and Ranking Member Hatch have agreed to hold a tax reform hearing on corporate taxation, which is expected to highlight corporate inversions.

Meanwhile, Ways and Means Committee Chairman Dave Camp (R-MI) indicated he believes this is an issue better addressed in comprehensive tax reform. His comprehensive tax reform draft included several provisions intended to protect the U.S. tax base.

Other members on and off the tax-writing committees have been taking their own steps to address the issue. On May 20, 2014, Senator Levin and House Ways and Ranking Member Levin introduced companion legislation to limit corporate inversions. The “Stop Corporate Inversions Act of 2014” would reduce the current continuity of U.S. ownership test from 80 percent to 50 percent for purposes of determining whether an inverted company would be treated as a domestic entity for U.S. tax purposes. As an alternative to the percentage test, the legislation also would treat an inverted entity as a domestic company if the management and control of the business occurs within the U.S. and the entity has significant U.S. business activity. It would eliminate the 60 percent test, treating an entity as fully inverted or not at all.

The Levin bills are nearly identical, with the notable exception that the Senate version includes a two-year sunset to give Congress time to pursue comprehensive tax reform, while the House version does not. The revenue estimates reflect this difference:  the permanent bill is estimated to raise $19.5 billion over the ten-year budget window, while the temporary bill is estimated to raise $791 million over the same period. This difference in the scores may result, in part, from the likelihood that some deals may be postponed until after the sunset, but not abandoned.  In general, the Levin legislation draws from an Obama Administration budget proposal and existing inversion rules and regulations. The Senate bill has 19 co-sponsors and the House bill has 9. 

Can the Internal Revenue Service do anything?

The agency issued regulations on inversions as recently as January of 2014. IRS Commissioner John Koskinen recently stated he does not think there is anything more the IRS can do to clamp down on inversions without a change in the tax laws.

What about the White House?

President Obama’s budget eleased earlier this year includes an anti-inversion proposal that appears to be the model for the Levin legislation. It drops the continuity of U.S. ownership threshold from 80 percent to 50 percent, and eliminates the separate 60 percent category. It also includes a “management and control” feature that would treat an inverted corporation as a U.S. company even if the 50 percent threshold is not met. Aside from the budget proposal, the White House has not aggressively marketed the proposal to Congress.

Are Inversions a Big Deal?

About 50 U.S. corporations have inverted over the past 30 years. In the late 1990s and early 2000s, there was a flurry of inversion activity. In response, then-Senate Finance Committee Chairman Max Baucus (D-MT) and Ranking Member Chuck Grassley (R-IA) joined forces to put companies considering inversions on notice that they would proceed at their own peril, introducing retroactive anti-inversion legislation in 2002. Chairman Wyden’s approach is similar, although not bipartisan. It wasn’t until October 2004 that anti-inversion legislation was enacted, but notably it was effective for inversions in taxable years beginning after March 4, 2003—the same retroactive approach Chairman Wyden has warned about. This legislation established the 80 percent threshold, which some now consider inadequate to stem the flow of U.S. businesses to foreign owners.

What happens next?

The debate over corporate inversions and their effect on the U.S. economy, U.S. jobs and the U.S. tax base is probably here to stay—at least until addressed as a stand-alone bill or as part of comprehensive tax reform.

Anti-inversion legislation is likely to be met with strong opposition from the U.S. business community for several reasons. There are many U.S./foreign transactions not motivated primarily by tax considerations; even if they are, there are fiduciary considerations to shareholders, which include minimizing taxes in order to increase cash income and enhance competitiveness. Particularly when the prospects of a reduced U.S. corporate tax rate through tax reform appear to be diminishing, companies seeking lower tax rates and tax rate certainty may consider an inversion more seriously. Further, it will be very difficult to “thread the needle” to draft legislation that would deter “loophole” transactions but not quash transactions driven by strategic and operational considerations. Many will argue such legislation will have exactly the opposite effect than intended, stimulating an even greater exodus of companies from the U.S., depressing U.S. economic growth and job creation, and deterring foreign investment in the United States. Finally, there is the belief that such significant international tax law change should only be in the context of comprehensive tax reform, not in a one-off manner. 

On Capitol Hill, work on tax reform is expected to continue, and inversions will be part of the discussion. Chairman Wyden and Ranking Member Hatch agree the issue should be addressed as part of comprehensive tax reform, as has current Ways and Means Chairman Camp. Mr. Wyden has indicated he intends to pursue reform in 2015. Presumed new Ways and Means Chairman Paul Ryan (R-WI) has included tax reform in his recent budget proposals, and Ways and Means Ranking Member Levin can be expected to continue to push for consideration of his legislation both in the context of tax reform and separately.

Other members can be expected to push for a stand-alone remedy, as well. Although Sen. Carl Levin is retiring from the Senate, he leaves a legacy of work on offshore tax abuse, and his anti-inversion co-sponsors can be expected to carry on where he left off. With an estimated revenue score (without sunset) of almost $20 billion, anti-inversion legislation is likely to be proposed as a revenue offset for other legislation by other members.

Chairman Wyden’s warning about a retroactive approach, the introduction of the Levin brothers’ legislation, potential hearings, and the ongoing threat of using anti-inversion legislation as an offset will create significant uncertainly in the business community, as strategic and operational decisions that cannot wait are being made. While not directly related to anti-inversion rules, the Organization for Economic Cooperation and Development’s base erosion and profit shifting process, with its focus on protecting the tax base of jurisdictions, also contributes to the uncertainty hovering over corporate strategic and organizational decisions. 

What should I do?

U.S. companies considering transactions involving foreign entities should not disregard the renewed interest in inversion activity. It will be difficult for Congress to draw the line between an abusive transaction and one that is not, so transactions not intended to be caught up in anti-inversion legislation could be included, especially when existing proposals rely heavily on subjective terms such as “substantial or significant” when testing for the extent of business activity. Even if a transaction does not fall within the parameters of proposed legislation, attention to transactions involving U.S. and foreign companies may also create reputational risk that is difficult to overcome. It would be prudent for any U.S. company considering a transaction with a foreign corporation to consider weighing in with members of Congress on this very important and significant matter. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© K&L Gates LLP | Attorney Advertising

Written by:

K&L Gates LLP

K&L Gates LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.