According to these documents, the bill would:
- Effectively impose a two-year sunset rule (or “moratorium” as referred to in the press release) for inversions, including the practice of shifting a corporation’s tax residence overseas through acquisition of an offshore company to avoid paying U.S. income taxes
- Significantly reduce a tax "loophole" that allows U.S. companies that merge with foreign companies to reincorporate offshore in lower-tax jurisdictions 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% 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% of its employees, sales, and assets where it is incorporated.
The legislation would increase the needed percentage change in stock ownership from 20% to 50% and would provide that the merged company would 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 United States and either 25% of its employees or sales or assets are located in the United States.
The bill would add a two-year sunset rule with respect to inversions that do not meet the proposed stricter tests, so that Congress can consider a long-term solution as part of general corporate tax reform.
The president’s FY 2015 budget contains a similar proposal, and today’s legislative proposal largely mirrors that budget proposal.
Companion legislation is being introduced in the House of Representatives by Rep. Sander Levin (D-MI), the ranking member on the House Ways and Means Committee.
When announcing a similar proposal as part of the Obama Administration’s FY 2015 budget, the Treasury Department stated “...there is no policy reason to permit a domestic entity to engage in an inversion transaction when its owners retain a controlling interest [ >50%] in the resulting entity, only minimal operational changes are expected, and there is significant potential for substantial erosion of the U.S. tax base.”
The focus on “operational change” is viewed as being particularly stark in connection with the aspect of the provision that would treat an acquiring corporation as a domestic corporation—even in the absence of any continuing historic ownership—if the entity continues to be managed and controlled in the United States and does material amounts of business within the United States.