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U.S. Treasury Action Is Positive Step Toward Thwarting Economically Unpatriotic Inversions

Sept. 23, 2014

U.S. Treasury Action Is Positive Step Toward Thwarting Economically Unpatriotic Inversions

Statement by Susan Harley, Deputy Director, Public Citizen’s Congress Watch Division

Note: The U.S. Treasury Department announced yesterday evening that it is taking some steps to limit the economic incentives of inversions, which occur when a company merges with another corporation and reincorporates, typically in a jurisdiction with lower tax rates. At present, when a newly inverted company retains 80 percent of its previous shareholders, U.S. law treats it as domestic for tax purposes. Under Treasury’s changes, the adverse tax consequences for inverted companies whose former shareholders retain 60-79 percent of the newly formed reincorporated company would be much heavier than under existing tax rules. Also, the changes made by Treasury will make it harder for companies to get around the 80 percent threshold. However, the Stop Corporate Inversions Act, proposed by U.S. Sen. Carl Levin (D-Mich.) and U.S. Rep. Sander Levin (D-Mich.), is still needed because it would lower the definitional threshold for when a company is treated as domestic for tax purposes from the current 80 percent down to 50 percent of the new company’s stock being held by previous domestic shareholders.

Public Citizen applauds the action of the U.S. Treasury and President Obama’s administration for taking strong action to prevent some of the economic incentives of inversions. The Treasury’s actions sent a strong signal to companies who are planning to desert the USA and invert – moving their “paper headquarters” to another country. Legislation is still needed, though, to make sure multinational corporations aren’t shirking their tax obligations, leaving average taxpayers high and dry.

With accounting gimmicks used so frequently they have nicknames like ‘hopscotch loans’ and ‘spinversions,’ Treasury’s actions are needed to combat a longtime culture of tax dodging within some multinational corporations. Without teams of wily tax lawyers, small businesses and average taxpayers are left to pick up the tab when corporations like Burger King announce they are skipping town and relocating in another country.

We look forward to working with members of both the U.S. House and Senate to pass legislation to connect the dots and completely remove the incentive for companies to invert. President Obama’s Treasury Department has gone a long way to rectifying the problem, but until inverted companies that have a majority of the same shareholders are taxed the same as their U.S. parent company, an incentive will exist to game the system.