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FACTBOX-Corporate foreign tax dodge has bedeviled U.S. for decades
May 20, 2014 / 9:03 PM / 4 years ago

FACTBOX-Corporate foreign tax dodge has bedeviled U.S. for decades

May 20 (Reuters) - Congressional Democrats on Tuesday proposed another clampdown on a corporate tax-dodging strategy known as “inversion” that the U.S. government has grappled with for 30 years.

Inversions involve a U.S. multinational shifting its tax domicile to a foreign country with a corporate income tax rate lower than the U.S. rate.

About 50 such deals have occurred, half of them since the 2008-2009 credit crisis. Here is a summary of government efforts to manage them.

ISLAND TIME

The first inversion was in 1982. No more big ones followed until a flurry of deals in the mid-1990s and early 2000s. They typically involved U.S. stockholders of a U.S. corporation exchanging shares for those of a smaller company in, for instance, Bermuda or the Cayman Islands.

That would make the island tax haven company the new parent of the U.S. business, though operations largely stayed in the United States. The name “inversion” came from the idea of turning the company upside down, making the small offshore parent its new head and allowing it to book the profits and the overall business to avoid higher U.S. income tax rates.

TREASURY RESPONDS

The Treasury Department expressed concern about the deals and Congress amended the tax code in 2004.

The new law set two tests. If the investors in the original U.S. company still held 80 percent or more of the shares in the new, foreign parent, then the new parent would be treated as a U.S. company, not a foreign one, for tax purposes.

The same treatment would apply if the new, foreign parent had no “substantial business activities” in its home country. This provision specifically targeted island tax haven holding companies that are sometimes little more than a post office box.

After these rules were adopted, the flow of deals dried up.

NEXT WAVE

Another burst of inversions started in 2008, but their shape changed. First, the destination countries were no longer island havens. Instead, parents were being set up in Ireland, Switzerland, Canada, Britain and the Netherlands.

Second, the deals were structured to take advantage of a part of the law that said if the original U.S. shareholders owned from 60 to 80 percent of the new, foreign parent, it would be treated as a foreign entity with some restrictions.

Tax lawyers and accountants who design inversions piled into the 60-80 percent space. The Internal Revenue Service issued new rules that were repeatedly replaced and revised.

OBAMA, CONGRESS PROPOSALS

President Barack Obama has made proposals every year since 2010 to rein in inversions, but Congress has taken no action.

This year Obama called for scrapping the 60-80 percent test and changing the 80 percent holdings test to 50 percent. He urged a “substantial business activities” test that would deny foreign company status in cases where operations were still primarily in the United States and U.S.-managed.

Democrats introduced bills on Tuesday resembling Obama’s proposal, with a two-year moratorium on inversions. (Editing by Howard Goller and Lisa Shumaker)

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