[Congressional Record Volume 148, Number 39 (Thursday, April 11, 2002)]
[Senate]
[Pages S2592-S2594]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. GRASSLEY (for himself and Mr. Baucus):
  S. 2119. A bill to amend the Internal Revenue Code of 1986 to provide 
for the tax treatment of inverted corporate entities and of 
transactions with such entities, and for other purposes; to the 
Committee on Finance.
  Mr. GRASSLEY. Madam President, I rise today to offer a bill on behalf 
of Senator Baucus and myself, to address the growing problem of 
corporate inversions. Our legislation, the ``Reversing the Expatriation 
of Profits Offshore,'' REPO Act, will stem the rising tide of corporate 
inversions.
  It's tax season. Citizens across America are filing their taxes this 
week. They're paying their taxes. A lot of taxes. But some corporate 
citizens are relaxing this tax season. They've moved their mailing 
address out of the country. They've set up a filing cabinet and a mail 
box overseas. This way, they escape from millions of dollars of Federal 
taxes.
  These corporate expatriations aren't illegal. But they're sure 
immoral. During a war on terrorism, coming out of a recession, everyone 
ought to be pulling together. But instead, these companies are using 
recession and terrorism to get out of the United States. If companies 
don't have their hearts in America, they ought to get out.
  Adding insult to injury, some of these companies have fat contracts 
with the government. So they'll take other people's tax dollars to make 
a profit, but they won't pay their share of taxes to keep America 
strong.
  The bill Chairman Baucus and I are introducing today will place 
corporate inversions on the endangered species list. Our bill requires 
the IRS to look at where a company has its heart and soul, not where it 
has a filing cabinet and a mail box. If a company remains controlled in 
the United States, our bill requires the company to pay its fair share 
of taxes, plain and simple.
  When I am firmly committed to halting corporate inversions, I also 
recognize that the rising tide of corporate expatriations demonstrates 
that our international tax rules are deeply flawed. In many cases, 
those flaws seriously undermine an American company's ability to 
compete in the global marketplace. This competitive disadvantage is 
often cited by companies that engage in inversion transactions.
  I believe that we need to bring our international tax system in line 
with our open market trade policies, and wish to affirm for the record 
that reform of our international tax laws is necessary for our U.S. 
businesses to remain competitive in the global marketplace. Moreover, 
those U.S. companies that rejected doing a corporate inversion are left 
to struggle with the complexity and competitive impediments of our 
international tax rules. This is an unjust result for companies that 
chose to remain in the United States of America. I am committed to 
remedying this inequity.
  Mr. President, I ask unanimous consent that the text of the bill and 
a technical explanation be printed in the Record.
  There being no objection, the material was ordered to be printed in 
the Record, as follows:

                                S. 2119

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Reversing the Expatriation 
     of Profits Offshore Act''.

     SEC. 2. TAX TREATMENT OF INVERTED CORPORATE ENTITIES.

       (a) In General.--Subchapter C of chapter 80 of the Internal 
     Revenue Code of 1986 (relating to provisions affecting more 
     than one subtitle) is amended by adding at the end the 
     following new section:

     ``SEC. 7874. RULES RELATING TO INVERTED CORPORATE ENTITIES.

       ``(a) Inverted Corporations Treated as Domestic 
     Corporations.--
       ``(1) In general.--If a foreign incorporated entity is 
     treated as an inverted domestic corporation, then, 
     notwithstanding section 7701(a)(4), such entity shall be 
     treated for purposes of this title as a domestic corporation.
       ``(2) Inverted domestic corporation.--For purposes of this 
     section, a foreign incorporated entity shall be treated as an 
     inverted domestic corporation if, pursuant to a plan (or a 
     series of related transactions)--
       ``(A) the entity completes after March 20, 2002, the direct 
     or indirect acquisition of substantially all of the 
     properties held directly or indirectly by a domestic 
     corporation or substantially all of the properties 
     constituting a trade or business of a domestic partnership,
       ``(B) after the acquisition at least 80 percent of the 
     stock (by vote or value) of the entity is held--
       ``(i) in the case of an acquisition with respect to a 
     domestic corporation, by former shareholders of the domestic 
     corporation by reason of holding stock in the domestic 
     corporation, or
       ``(ii) in the case of an acquisition with respect to a 
     domestic partnership, by former partners of the domestic 
     partnership, and
       ``(C) the expanded affiliated group which after the 
     acquisition includes the entity does not have substantial 
     business activities in the foreign country in which or under 
     the law of which the entity is created or organized when 
     compared to the total business activities of such expanded 
     affiliated group.
       ``(b) Preservation of Domestic Tax Base In Certain 
     Inversion Transactions To Which Subsection (a) Does Not 
     Apply.--
       ``(1) In general.--If a foreign incorporated entity would 
     be treated as an inverted domestic corporation with respect 
     to an acquired entity if either--
       ``(A) subsection (a)(2)(A) were applied by substituting `on 
     or before March 20, 2002' for `after March 20, 2002' and 
     subsection (a)(2)(B) were applied by substituting `more than 
     50 percent' for `at least 80 percent', or
       ``(B) subsection (a)(2)(B) were applied by substituting 
     `more than 50 percent' for `at least 80 percent',
     then the rules of subsection (c) shall apply to any inversion 
     gain of the acquired entity during the applicable period and 
     the rules of subsection (d) shall apply to any related party 
     transaction of the acquired entity during the applicable 
     period. This subsection shall not apply for any taxable year 
     if subsection (a) applies to such foreign incorporated entity 
     for such taxable year.
       ``(2) Acquired entity.--For purposes of this section--
       ``(A) In general.--The term `acquired entity' means the 
     domestic corporation or partnership substantially all of the 
     properties of which are directly or indirectly acquired in an 
     acquisition described in subsection (a)(2)(A) to which this 
     subsection applies.
       ``(B) Aggregation rules.--Any domestic person bearing a 
     relationship described in section 267(b) or 707(b) to an 
     acquired entity shall be treated as an acquired entity with 
     respect to the acquisition described in subparagraph (A).
       ``(3) Applicable period.--For purposes of this section--
       ``(A) In general.--The term `applicable period' means the 
     period--
       ``(i) beginning on the first date properties are acquired 
     as part of the acquisition described in subsection (a)(2)(A) 
     to which this subsection applies, and
       ``(ii) ending on the date which is 10 years after the last 
     date properties are acquired as part of such acquisition.
       ``(B) Special rule for inversions occurring before march 
     21, 2002.--In the case of any acquired entity to which 
     paragraph (1)(A) applies, the applicable period shall be the 
     10-year period beginning on January 1, 2002.
       ``(c) Tax on Inversion Gains May Not Be Offset.--If 
     subsection (b) applies--
       ``(1) In general.--The taxable income of an acquired entity 
     for any taxable year which includes any portion of the 
     applicable period shall in no event be less than the 
     inversion gain of the entity for the taxable year.
       ``(2) Credits not allowed against tax on inversion gain.--
     Credits shall be allowed against the tax imposed by chapter 1 
     on an acquired entity for any taxable year described in 
     paragraph (1) only to the extent such tax exceeds the product 
     of--
       ``(A) the amount of taxable income described in paragraph 
     (1) for the taxable year, and
       ``(B) the highest rate of tax specified in section 
     11(b)(1).
       ``(3) Special rules for partnerships.--In the case of an 
     acquired entity which is a partnership--
       ``(A) the limitations of this subsection shall apply at the 
     partner rather than the partnership level,
       ``(B) the inversion gain of any partner for any taxable 
     year shall be equal to the sum of--
       ``(i) the partner's distributive share of inversion gain of 
     the partnership for such taxable year, plus
       ``(ii) gain required to be recognized for the taxable year 
     by the partner under section 367(a), 741, or 1001, or under 
     any other provision of chapter 1, by reason of the transfer 
     during the applicable period of any partnership interest of 
     the partner in such partnership to the foreign incorporated 
     entity, and
       ``(C) the highest rate of tax specified in the rate 
     schedule applicable to the partner under chapter 1 shall be 
     substituted for the rate of tax under paragraph (2)(B).
       ``(4) Inversion gain.--For purposes of this section, the 
     term `inversion gain' means the gain required to be 
     recognized under section 304, 311(b), 367, 1001, or 1248, or 
     under any other provision of chapter 1, by reason of the 
     transfer during the applicable period of stock or other 
     properties by an acquired entity--
       ``(A) as part of the acquisition described in subsection 
     (a)(2)(A) to which subsection (b) applies, or
       ``(B) after such acquisition to a foreign related person.
       ``(5) Coordination with section 172 and minimum tax.--Rules 
     similar to the rules of paragraphs (3) and (4) of section 
     860E(a) shall apply for purposes of this subsection.

[[Page S2593]]

       ``(d) Special Rules Applicable to Related Party 
     Transactions.--
       ``(1) Annual preapproval required.--
       ``(A) In general.--An acquired entity to which subsection 
     (b) applies shall enter into an annual preapproval agreement 
     under subparagraph (C) with the Secretary for each taxable 
     year which includes a portion of the applicable period.
       ``(B) Failures to enter agreements.--If an acquired entity 
     fails to meet the requirements of subparagraph (A) for any 
     taxable year, then for such taxable year--
       ``(i) there shall not be allowed any deduction, or addition 
     to basis or cost of goods sold, for amounts paid or incurred, 
     or losses incurred, by reason of a transaction between the 
     acquired entity and a foreign related person,
       ``(ii) any transfer or license of intangible property (as 
     defined in section 936(h)(3)(B)) between the acquired entity 
     and a foreign related person shall be disregarded, and
       ``(iii) any cost-sharing arrangement between the acquired 
     entity and a foreign related person shall be disregarded.
       ``(C) Preapproval agreement.--For purposes of subparagraph 
     (A), the term `preapproval agreement' means a prefiling, 
     advance pricing, or other agreement specified by the 
     Secretary which--
       ``(i) is entered into at such time as may be specified by 
     the Secretary, and
       ``(ii) contains such provisions as the Secretary determines 
     necessary to ensure that the requirements of sections 163(j), 
     267(a)(3), 482, and 845, and any other provision of this 
     title applicable to transactions between related persons and 
     specified by the Secretary, are met.
       ``(2) Modifications of limitation on interest deduction.--
     In the case of an acquired entity to which subsection (b) 
     applies, section 163(j) shall be applied--
       ``(A) without regard to paragraph (2)(A)(ii) thereof, and
       ``(B) by substituting `25 percent' for `50 percent' each 
     place it appears in paragraph (2)(B) thereof.
       ``(e) Other Definitions and Special Rules.--For purposes of 
     this section--
       ``(1) Rules for application of subsection (a)(2).--In 
     applying subsection (a)(2) for purposes of subsections (a) 
     and (b), the following rules shall apply:
       ``(A) Certain stock disregarded.--There shall not be taken 
     into account in determining ownership for purposes of 
     subsection (a)(2)(B)--
       ``(i) stock held by members of the expanded affiliated 
     group which includes the foreign incorporated entity, or
       ``(ii) stock of such entity which is sold in a public 
     offering related to the acquisition described in subsection 
     (a)(2)(A).
       ``(B) Plan deemed in certain cases.--If a foreign 
     incorporated entity acquires directly or indirectly 
     substantially all of the properties of a domestic corporation 
     or partnership during the 4-year period beginning on the date 
     which is 2 years before the ownership requirements of 
     subsection (a)(2)(B) are met, such actions shall be treated 
     as pursuant to a plan.
       ``(C) Certain transfers disregarded.--The transfer of 
     properties or liabilities (including by contribution or 
     distribution) shall be disregarded if such transfers are part 
     of a plan a principal purpose of which is to avoid the 
     purposes of this section.
       ``(D) Special rule for related partnerships.--For purposes 
     of applying subsection (a)(2) to the acquisition of a 
     domestic partnership, except as provided in regulations, all 
     partnerships which are under common control (within the 
     meaning of section 482) shall be treated as 1 partnership.
       ``(2) Expanded affiliated group.--The term `expanded 
     affiliated group' means an affiliated group as defined in 
     section 1504(a) but without regard to section 1504(b), except 
     that section 1504(a) shall be applied by substituting `more 
     than 50 percent' for `at least 80 percent' each place it 
     appears.
       ``(3) Foreign incorporated entity.--The term `foreign 
     incorporated entity' means any entity which is, or but for 
     subsection (a)(1) would be, treated as a foreign corporation 
     for purposes of this title.
       ``(4) Foreign related person.--The term `foreign related 
     person' means, with respect to any acquired entity, a foreign 
     person which--
       ``(A) bears a relationship to such entity described in 
     section 267(b) or 707(b), or
       ``(B) is under the same common control (within the meaning 
     of section 482) as such entity.
       ``(f) Regulations.--The Secretary shall provide such 
     regulations as are necessary to carry out this section, 
     including regulations providing for such adjustments to the 
     application of this section as are necessary to prevent the 
     avoidance of the purposes of this section, including the 
     avoidance of such purposes through--
       ``(1) the use of related persons, pass-through or other 
     noncorporate entities, or other intermediaries, or
       ``(2) transactions designed to have persons cease to be (or 
     not become) members of expanded affiliated groups or related 
     persons.''.
       (b) Treatment of Agreements.--
       (1) Confidentiality.--
       (A) Treatment as return information.--Section 6103(b)(2) of 
     the Internal Revenue Code of 1986 (relating to return 
     information) is amended by striking ``and'' at the end of 
     subparagraph (C), by inserting ``and'' at the end of 
     subparagraph (D), and by inserting after subparagraph (D) the 
     following new subparagraph:
       ``(E) any preapproval agreement under section 7874(d)(1) to 
     which any preceding subparagraph does not apply and any 
     background information related to the agreement or any 
     application for the agreement,''.
       (B) Exception from public inspection as written 
     determination.--Section 6110(b)(1)(B) of such Code is amended 
     by striking ``or (D)'' and inserting ``, (D), or (E)''.
       (2) Reporting.--The Secretary of the Treasury shall include 
     with any report on advance pricing agreements required to be 
     submitted after the date of the enactment of this Act under 
     section 521(b) of the Ticket to Work and Work Incentives 
     Improvement Act of 1999 (Public Law 106-170) a report 
     regarding preapproval agreements under section 7874(d)(1) of 
     the Internal Revenue Code of 1986. Such report shall include 
     information similar to the information required with respect 
     to advance pricing agreements and shall be treated for 
     confidentiality purposes in the same manner as the reports on 
     advance pricing agreements are treated under section 
     521(b)(3) of such Act.
       (c) Conforming Amendments.--The table of sections for 
     subchapter C of chapter 80 of the Internal Revenue Code of 
     1986 is amended by adding at the end the following new item:

``Sec. 7874. Rules relating to inverted corporate entities.''

     SEC. 3. REINSURANCE OF UNITED STATES RISKS IN FOREIGN 
                   JURISDICTIONS.

       (a) In General.--Section 845(a) of the Internal Revenue 
     Code of 1986 (relating to allocation in case of reinsurance 
     agreement involving tax avoidance or evasion) is amended by 
     striking ``source and character'' and inserting ``amount, 
     source, or character''.
       (b) Effective Date.--The amendments made by this section 
     shall apply to any risk reinsured after April 11, 2002.
                                  ____


 Reversing the Expatriation of Profits Offshore, REPO, Act--Technical 
          Explanation of the Staff of the Committee on Finance

       Senate Finance Committee Ranking Member Chuck Grassley, R-
     IA, and Chairman Max Baucus, D-MT, today are offering their 
     legislative response to the growing problem of corporate 
     inversions, the ``Reversing the Expatriation of Profits 
     Offshore'', REPO, Act. Following is a brief summary of the 
     REPO Act.
       In general, this legislation would curtail the tax benefits 
     sought by U.S. companies undertaking inversion transactions. 
     The legislation would apply to two types of inversion 
     transactions, which would be subject to different regimes 
     under the proposal.
       The first type would be a ``pure'' or nearly pure 
     inversion, in which: 1. a U.S. corporation becomes a 
     subsidiary of a foreign corporation or otherwise transfers 
     substantially all of its properties to a foreign corporation; 
     2. the former shareholders of the U.S. corporation end up 
     with 80 percent or more (by vote or value) of the stock of 
     the foreign corporation after the transaction; and 3. the 
     foreign corporation, including its subsidiaries, does not 
     have substantial business activities in its country of 
     incorporation. The legislation would deny the intended tax 
     benefits of this type of inversion by deeming the top-tier 
     foreign corporation to be a domestic corporation for all 
     purposes of the Internal Revenue Code. This proposal would be 
     effective as to inversion transactions occurring on or after 
     March 21, 2002.
       For purposes of this proposal, corporations with no 
     significant operating assets, few or no permanent employees, 
     or no significant real property in the foreign country of 
     incorporation would not be treated as meeting the substantial 
     business activities test. In addition, companies would not be 
     considered to be conducting substantial business activities 
     in the country of incorporation by merely holding board 
     meetings in the foreign country or by relocating a limited 
     number of executives to the foreign jurisdiction.
       The second type of inversion covered by the legislation 
     would be a transaction similar to the ``pure'' inversion 
     defined above, except that the 80 percent ownership threshold 
     is not met. In such a case, if a greater-than-50 percent but 
     less than 80 percent ownership threshold is met, then a 
     second set of rules would apply to these ``limited'' 
     inversions.
       Under these rules, the inversion transaction would be 
     respected, i.e., the foreign corporation would be respected 
     as foreign, but: 1. the corporate-level ``toll charge'' for 
     establishing the inverted structure would be strengthened, 
     and 2. restrictions would be placed on the company's ability 
     to reduce U.S. tax on U.S.-source income going forward. These 
     measures generally would apply for a 10-year period following 
     the inversion. This prong of the proposal would be effective 
     as to inversion transactions in this second category 
     occurring on or after March 21, 2002. It would also be 
     effective as to all structures arising from pure inversions 
     or limited inversions that are grandfathered under the 
     legislation, but it would be applied to those structures 
     prospectively.
       Under the legislation, the corporate-level ``toll charge'' 
     imposed under sections 304, 311(b), 367, 1001, 1248, or any 
     other provision of the Internal Revenue Code with respect to 
     the transfer of controlled foreign corporation stock or other 
     assets from a U.S. corporation to a foreign corporation would 
     be taxable, without offset by any other tax attributes, e.g., 
     net operating losses or foreign tax credits. No similar 
     ``walling-off'' of toll charges would apply to shareholder-
     level toll charges imposed under section 367(a).

[[Page S2594]]

       In addition, no deductions or additions to basis or cost of 
     goods sold for transactions with foreign related parties 
     would be permitted unless the taxpayer concludes an annual 
     pre-filing agreement, advance pricing agreement, or other 
     agreement with the IRS, a ``preapproval agreement'', to 
     ensure that all related-party transactions comply with all 
     relevant provisions of the Code, including sections 482, 845, 
     163(j), and 267(a)(3). Similarly, the transfer or license of 
     intangible property from a U.S. corporation to a related 
     foreign corporation would be disregarded, and cost-sharing 
     arrangements would not be respected unless approved under 
     such an agreement.
       The confidentiality and disclosure rules normally 
     applicable to advance pricing agreements would apply to all 
     preapproval agreements entered into pursuant to this 
     legislation, and the parameters for the IRS's statutorily 
     required annual APA report would be amended to require a 
     summary section for inversion transactions.
       The second set of measures also includes modifications to 
     the ``earnings stripping'' rules of section 163(j) (which 
     deny or defer deductions for certain interest paid to foreign 
     related parties), as applied to inverted corporations. The 
     legislation would eliminate the debt-equity threshold 
     generally applicable under that provision and reduce the 50 
     percent threshold for ``excess interest expense'' to 25 
     percent.
       The provisions of both prongs of this legislation also 
     would apply to certain partnership transactions similar to 
     corporate inversion transactions.
       The legislation also strengthens the present-law rules of 
     section 845(a) in a manner intended to address reinsurance 
     transactions with foreign related parties that have the 
     effect of stripping out earnings of a U.S. corporation, 
     regardless of whether an inversion transaction has occurred. 
     The legislation modifies the present-law provision permitting 
     the Treasury Department to allocate or recharacterize items 
     of investment income, premiums, deductions, assets, reserves, 
     credits or other items, or to make other adjustments, under a 
     reinsurance agreement between related parties, if necessary 
     to reflect the proper source and character of income. The 
     legislation permits such an allocation, recharacterization or 
     adjustment if necessary to reflect the proper amount, source 
     or character of income. This provision would be effective for 
     any risk reinsured after April 11, 2002.

  Mr. BAUCUS. Madam President, I am pleased to be a co-sponsor, with 
Senator Grassley, of this important piece of legislation. Our 
legislation, Reversing the Expatriation of Profits Offshore, (REPO), 
Act, is designed to put the brakes on the potential rush to move U.S. 
corporate headquarters to tax havens, through increasingly popular 
transactions known as corporate inversions. Prominent U.S. companies 
are literally re-incorporating in off-shore tax havens in order to 
avoid U.S. taxes. They are, in effect, renouncing their U.S. 
citizenship to cut their tax bill.
  Tax avoidance costs honest taxpayers tens of billions of dollars each 
year. When one taxpayer, whether a corporation or an individual, 
doesn't pay their fair share of taxes, we all pay. The REPO Act cracks 
down on corporations that avoid taxes at the expense of honest, 
hardworking American taxpayers.
  The local hardware store in Butte, MT, isn't re-incorporating in 
Bermuda or one of these tax haven countries. He is keeping his company 
an American company. The companies reincorporating in tax haven 
countries, and their executives, are still physically located in the 
United States. Their executives and employees enjoy all the privileges 
afforded to honest U.S. taxpayers.
  I understand that the corporate inversion issue is complex. I also 
understand that, over the long term, we may need to consider whether 
the structure of the U.S. international tax rules creates an incentive 
for U.S. corporations to shift their operations abroad in order to 
remain competitive. For now, we are putting a stop to the erosion of 
the U.S. tax base through these tax avoidance schemes.
  Our legislation distinguishes between two types of inversions, pure 
inversions and limited inversions. A pure inversion is when a U.S. 
company becomes a subsidiary of a foreign company or shifts 
substantially all of its properties to a foreign corporation and 80 
percent of more of the shareholders in the original U.S. company are 
now shareholders in the new foreign company. The foreign company has no 
substantial business activity in the foreign tax haven country. 
Companies that hold board meetings in the tax haven country or send a 
few employees or executives to work in the tax haven country will not 
meet the substantial business activity standard. Under our legislation, 
the parent company will be treated as a U.S. company.
  A limited inversion transaction is when more than 50 percent and 
fewer than 80 percent of the shareholders are the same. The new foreign 
company is recognized as a foreign company for tax purposes but there 
is a tax cost. The company won't be able to use tax attributes, such as 
net operating losses and foreign tax credits, to offset the gain 
incurred upon inverting. Finally, the company won't be able to strip 
earnings out of the U.S. to avoid U.S. taxes.
  This week is the last week leading up to the April 15 tax filing 
deadline. Families in Montana and across the nation are sitting down at 
their kitchen tables, or at their home computers, and figuring out 
their taxes. The calculations may be complex, the tax bite may seem 
high, but by and large, with quiet patriotism, average Americans will 
step up and pay the tax they owe. They're counting on us to make sure 
that sophisticated corporations pay their fair share, as well.

                          ____________________