Senate Finance Hearing on Corporate Tax Avoidance

July 23, 2014

pic-taxes-fileOn July 22, the Senate Finance Committee held a hearing entitled: “The U.S. Tax Code: Love It, Leave It or Reform It!” on the international section of the tax code. The hearing had a heavy focus on how to best address inversions – the practice of U.S. companies moving their headquarters abroad in pursuit of lower tax rates – in both the immediate and long-term. At the start of the hearing, Senate Finance Committee Chairman Ron Wyden (D-Ore.) said inversions represent a clear sign that the U.S. tax code needs comprehensive reform to keep America competitive and create good-paying jobs.

In 2004, Congress enacted section 7874, where if a foreign corporation acquires, directly or indirectly, substantially all of the properties of a U.S. corporation, the foreign corporation will be treated as a domestic corporation if the continuing ownership of the legacy shareholders in the U.S. corporation exceeds 80 percent by vote or value. However, if the ownership of the legacy shareholders in the U.S. corporation exceeds 60 percent (but is less than 80 percent), the foreign corporation will not be treated as a domestic corporation, but it will lose some U.S. tax benefits.

Earlier this year, President Barack Obama’s Fiscal Year (FY) 2015 budget included a proposal to tighten section 7874 by changing the 80 percent test to 50 percent and eliminating the 60 percent test entirely.  The Treasury Department estimates that the President’s FY 2015 budget proposal on inversions would raise $17 billion in revenue over the next decade.

Soon thereafter, ranking member of the House Ways and Means Committee Sander Levin (D-Mich.) and Sen. Carl Levin (D-Mich.) introduced companions bills, the Stop Corporate Inversions Act of 2014 (H.R. 4679 and S. 2360), in their respective chambers that would tighten the section 7874 test to 50 percent and add a management and control test for inverted foreign corporations. Both bills would be effective for transactions completed after May 8, 2014. The Senate version would sunset after May 9, 2016 to address the immediate concerns about inversions while giving lawmakers time to adopt a permanent solution as a part of tax reform. The House version would be in effect permanently.

On July 15, Treasury Secretary Jack Lew sent a letter to the leaders of both the Senate Finance Committee and the House Ways and Means Committee encouraging them to act on both H.R. 4679 and S. 2360. Lew acknowledged that tax reform would be the best way to deal with inversions, but noted “there are concrete steps that Congress can take now that would address this urgent issue.” To stem the wave of corporate expatriations, Lew suggested Congress enact legislation immediately and make it retroactive to May 2014.

Lew’s letter prompted Wyden to hold the hearing yesterday and announce that he would consider taking action on inversions ahead of the tax reform process. It remains uncertain if the Finance Committee will consider Sen. Levin’s proposal or if the committee will unveil its own anti-inversion measure.

For more information about H.R. 4679, please click here.