Wednesday, May 21, 2014

CORPORATE INVERSIONS–FENCING IN U.S. BUSINESSES

The U.S. has a tax competitiveness problem – its effective corporate tax rates are among the highest in the world. Once upon a time the U.S. was on the low end, and attracted business and capital. Now that it is on the high end, new capital is repelled and existing businesses look to reorganize abroad to save taxes.

This is the story behind Pfizer’s attempt to acquire U.K pharmaceutical company AstraZeneca. While that transaction may or may not proceed, the tax policy discussion has heated up because of it.

There are two ways to address this problem. The first would be to reduce corporate tax rates, and otherwise make the U.S. a favorable tax jurisdiction. The second would be to impose punitive rules on U.S. businesses that seek to move abroad. Given today’s political environment, which one do you think is receiving more attention? I’ll give you a clue – the proposed legislation that has come out of the Pfizer attempt is entitled the “Stop Corporate Inversions Act of 2014.”

This legislation would expand the punitive provisions of existing Code §7874 to reach transactions not only where the U.S. entity’s shareholders acquire 80% or more of the foreign entity (as under existing law) but to lower that threshold to 50%, and to also apply the provisions to other transactions regardless of the 50% threshold. It would also expand its application to partnerships.

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