[Congressional Record (Bound Edition), Volume 153 (2007), Part 13]
[Extensions of Remarks]
[Pages 18071-18072]
[From the U.S. Government Publishing Office, www.gpo.gov]




             INTRODUCTION OF CORPORATE ANTI-INVERSION BILL

                                 ______
                                 

                          HON. RICHARD E. NEAL

                            of massachusetts

                    in the house of representatives

                        Thursday, June 28, 2007

  Mr. NEAL of Massachusetts. Madam Speaker, I rise to introduce 
legislation today to shut down a potential loophole in the anti-
inversion provisions of the tax code. As many of my colleagues will 
remember, I lead the charge back in early 2002 to shut down the so-
called ``corporate expatriate'' loophole. Corporate expatriates trade 
in their U.S. citizenship for citizenship in certain no-tax or low-tax 
havens through reincorporation or a corporate ``inversion.'' These 
corporate expatriates often have little or no presence in these haven 
jurisdictions; some merely rent a mailbox to establish their new 
headquarters.
  Following the attacks of September 11, 2001, some aggressive tax 
advisors were telling their clients that the climate was ripe for 
inversions as most stock prices were depressed. The only tax paid when 
a corporation departed was a tax on the gain of the stock or assets 
transferred to the new foreign parent company. As one tax advisor put 
it, ``Maybe patriotism needs to take a back seat to improved corporate 
profits.''
  Despite the outcry from shareholders, taxpayers, and many of us in 
Congress, the leadership of the prior Congress fought enactment of a 
loophole closer. It was not until late in 2004, in the American Jobs 
Creation Act, that corporate expatriation was finally put to a halt. 
That bill used the same formula of my original bill--simply stating 
that if almost all of the shareholders of the new foreign company were 
the same as under the old American company and if the company had 
little real business in the host foreign country, then the corporate 
expatriate would be taxed as if it were still a U.S. company.
  That new law put a chill on the market for corporate expatriation. 
However, earlier this year, one American company stated it was moving 
the headquarters of the operation to a foreign country with no 
corporate income tax.

[[Page 18072]]

The company is not really changing its residency. Many have speculated 
that this is really a two-step process: move some administrative 
functions abroad to establish a minimal presence, and then give up U.S. 
corporate citizenship.
  I think this would circumvent the intent of the original law and that 
is why I am filing legislation today to close that loophole. My bill 
would exclude any management or administrative functions, including the 
corporate headquarters, from the calculation of what constitutes 
substantial business activities in the foreign country. I am sure that 
many CEOs would not think it too much a sacrifice to relocate their 
office to the sunnier climes of some of these havens and thereby shave 
millions off of the company's tax bill. I urge my colleagues to support 
my legislation to prevent this type of tax avoidance.
  I would also add that I do not view these events in a vacuum. 
Clearly, this Congress needs to look at more incentives to keep 
American companies and jobs here. I have discussed with Chairman Rangel 
holding hearings on how our tax code treats both domestic and foreign 
sources of income to make sure American companies can successfully 
compete in a global market. However, until such changes are made, I 
will continue my efforts to prevent ``self-help'' maneuvers, such as 
the fiction of corporate expatriation.
  A summary of my bill follows:

                              Bill Summary


                              Present law

       Section 801 of the American Jobs Creation Act of 2004 
     (AJCA) added section 7874 to the Internal Revenue Code. 
     Section 7874 provides certain rules designed to remove 
     incentives for corporations to engage in inversion 
     transactions. However, the anti-inversion rules do not apply 
     if the expanded affiliated group (EAG) of the corporation has 
     business activities in the foreign country in which, or under 
     the laws of which, the acquiring foreign entity was created 
     or organized and such business activities are substantial 
     when compared to the total business activities of the EAG. 
     (For purposes of section 7874, the EAG is similar to the 
     affiliated group permitted to file a consolidated federal 
     income tax return, except that companies are considered to be 
     in the expanded affiliated group if they are more than 50 
     percent owned by the common parent or other members (the 
     consolidation rules required 80 percent) and foreign 
     corporations may be included in the expanded affiliated 
     group.) In explaining the reason for this legislative change, 
     the ``Blue Book'' compiled by Joint Tax states, ``The 
     Congress believed that inversion transactions resulting in 
     minimal presence in a foreign country of incorporation were a 
     means of avoiding U.S. tax and should be curtailed.'' Staff 
     of Joint Comm. on Taxation, General Explanation of Tax 
     Legislation Enacted in the 108th Congress, at 343 (Comm. 
     Print JCS-5-05).
       On June 5, 2006, the Department of the Treasury and the 
     Internal Revenue Service issued Temporary and Proposed 
     Regulations that, among other things, provide certain rules 
     regarding the substantial activities test (T.D. 9265). The 
     regulations provide both an all-facts-and-circumstances test 
     and a bright-line safe harbor test to determine whether an 
     EAG has substantial business activities in the acquiring 
     foreign entity's country of incorporation when compared to 
     the total business activities of the EAG. Under the general 
     rule of the all-facts-and-circumstances test, the 
     determination of whether the EAG has substantial business 
     activities in the relevant foreign country, when compared to 
     the total business activities of the EAG, is based on an 
     analysis of all the facts and circumstances of each case. The 
     regulations set forth a non-exclusive list of factors to be 
     considered in the analysis. The weight given to any factor 
     depends on the particular circumstances. The listed factors 
     include, among other factors, the EAG's local employee 
     headcount and payroll, property, and sales; the EAG's 
     historical presence in the foreign country; its management 
     activities in the country; and the strategic importance to 
     the EAG as a whole of the business activities in that 
     country.
       The regulations state that the presence or absence of any 
     factor, or any particular number of factors, in the list is 
     not determinative, and that there is no minimum percentage of 
     the group's total employee headcount, payroll, assets, or 
     sales that must be shown to be in the foreign country.
       The safe harbor test is satisfied if the EAG satisfies 
     three conditions, relating to employees, assets, and sales. 
     The first condition is that the group employees based in the 
     foreign country account for at least 10 percent (by headcount 
     and compensation) of total group employees. The second 
     condition is that the total value of the group assets located 
     in the foreign country represents at least 10 percent of the 
     total value of all group assets. The third condition is that 
     the group sales made in the foreign country accounts for at 
     least 10 percent of total group sales.


                                The bill

       The bill provides that for purposes of the substantial 
     activities test of section 7874, any management or 
     administrative activities, including the location of any 
     corporate headquarters, taking place in the foreign country 
     in which, or under the law of which, the inverted entity is 
     created or organized shall not be taken into account as 
     business activities. Under the bill, for example, if a U.S. 
     company inverts to country X, and its management is located 
     in country X or performs much of its management activities 
     there, the activities of its management in country X are not 
     taken into account for purposes of determining whether the 
     activities of the EAG in country X are substantial when 
     compared to the total worldwide business activities of the 
     EAG. On the other hand, under that example if any management 
     activities of the EAG take place outside of country X, such 
     management activities are taken into account in applying the 
     substantial activities test.
       The bill modifies the statutory substantial business 
     activities test, and accordingly limits the application of 
     both the all-facts-and-circumstances test and the safe harbor 
     of the regulations.
       Under the bill, the term ``management activities'' includes 
     any management activities, and therefore extends beyond top 
     corporate management. For example, it would include 
     management activities relating to operational units. 
     Similarly, the term ``administrative activities'' includes 
     departments whose function is essentially administrative in 
     nature, such as accounting, as well as administrative 
     activities relating to or performed by operational units.

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