Sen. Carl Levin, D-Mich., and Rep. Sander M. Levin, D-Mich., Ways and Means ranking minority member, have introduced legislation that would strengthen anti-inversion rules under Section 7874 by making it more difficult for U.S. companies to escape treatment as domestic entities after merging with a foreign company.
Section 7874, enacted in 2004, generally requires U.S. corporations to continue to be treated as domestic U.S. entities after a merger with a foreign corporation if more than 80% of the stock in the new entity is held by the shareholders of the original U.S. corporation. The Stop Corporate Inversions Act of 2014 would lower that threshold to 50%, so that any U.S. corporation merging with a foreign corporation could be treated as foreign only if more than 50% of the stock in the new corporation is actually held by the shareholders from the foreign corporation.
The bill was spurred by news that U.S. drug maker Pfizer was considering merging with the smaller U.K. company, AstraZeneca, and reorganizing as a foreign company. The news was the latest in a string of recent mergers that policymakers argue are motivated by U.S. companies seeking to escape taxation as domestic entities.
The Stop Corporate Inversions Act of 2014 would be effective for any taxable year ending after May 8, 2014, the day the Levin brothers announced their plans. So if the legislation is eventually enacted with the current effective date, essentially any merger in the current tax year would be held to the new standard. Lawmakers said the threat of retroactive effective date is meant to "freeze" inversion activity until they actually enact legislation.
The legislation has support among some congressional Democrats and the White House, but Senate Finance Committee Chair Ron Wyden, D-Ore., said he does not want consider it as a standalone measure. He said the issue must be addressed only in the context of tax reform. Many Republicans also criticized the measure, arguing that lowering rates and moving to a more territorial tax system would do more to stop inversions than to strengthen Section 7874.
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