The Stop Corporate Inversions Act of 2014 has been created to prevent the loss of billions of dollars in revenue through a flood of inversions, a loss that would add to the tax burden of American taxpayers. This new bill would impose a two-year moratorium on inversions, the practice of shifting a corporation’s tax residence overseas through acquisition of an offshore company to avoid paying U.S. income taxes.
The average family in the U.S. pays over 18 percent in federal taxes, but by using loopholes like inversions, major corporations pay an average of 13 percent. The Stop Corporate Inversions Act of 2014 will save billions of dollars that can in turn be used for investments in education, infrastructure, and research and development.
According to Sen. Carl Levin, chairman of the Senate Permanent Subcommittee on Investigations and the bill’s lead sponsor, “The Treasury is bleeding red ink, and we can’t wait for comprehensive tax reform to stop the bleeding. Our legislation would clamp down on this loophole to prevent corporations from shifting their tax burden onto their competitors and average Americans while Congress is considering comprehensive tax reform.”
I recently sat down with Philip G. Cohen, a professor in the Legal Studies and Taxation Department of Pace University's Lubin School of Business and a retired Vice President-Tax & General Tax Counsel for Unilever United States, Inc. Professor Cohen said the bill should be enacted to prevent a major tax revenue drain by companies using inversions to reduce what they would otherwise owe in federal taxes.
“If the abuse is not stopped other companies will follow in a race to the bottom. The loss of U.S. revenue (from inversions) is enormous. That lost revenue has to be made up by somebody, namely individuals and companies that don't invert,” he explained.
According to Cohen, inversions are not the only reason the effective corporate tax rate is much smaller for many companies than the statutory corporate tax rate. There are other corporate loopholes that should be closed in conjunction with lowering the statutory corporate tax rate.
“This is about leveling the playing field and rooting out flagrant tax abuse in our system that could lead to billions of dollars of lost revenue," said Sen. Tim Kaine, D-Va. “In order to fully restore budget certainty, we need to look at abuses in the tax code as much as spending. The fact that companies can change their tax liability to low-tax jurisdictions on paper while maintaining operations and ownership in the U.S. is unacceptable and I'm pleased to join my colleagues to introduce this important fix.”
The bill is similar to a proposal in President Obama’s 2015 budget submission. 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. The bill introduced today would raise that 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. It also would bar companies from shifting tax residence offshore if their management and control and significant business operations remain in the United States.
The two-year moratorium is achieved through a two-year sunset provision designed to provide time for Congress to work on bipartisan comprehensive corporate tax reform. Companion legislation is being introduced in the House of Representatives by Rep. Sander Levin, D-Mich., the ranking member on the House Ways and Means Committee.