Attack On U.S. Companies Moving Offshore
By Stuart Anolik, Rob Bossart, Seth J. Entin
and Ronald L. Platt
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Recent headlines in The Wall Street Journal and The New York Times have
highlighted so-called "corporate expatriations" or "inversions." These headlines,
coupled with the aftermath of September 11th, have spurred members of Congress
to promulgate bills that would curb these corporate expatriations and even
consider companies engaging in these transactions as unpatriotic.
|"Notwithstanding increased scrutiny
and proposed legislation (which may or may not pass), opportunities
still exist for multinationals to minimize their global effective
tax rates and costs."
Inversion transactions have also received significant attention from
the press as well as Congress. In fact, several bills have been introduced
in Congress to curtail the tax benefits of such transactions. These bills
include H.R. 3884, Corporate Patriot Enforcement Act of 2002 (introduced
by Representative Neal on March 6, 2002); H.R. 3857 (introduced by Representative
McInnis on March 6, 2002); H.R. 3922, Save America’s Jobs Act of 2002 (introduced
by Representative Maloney on March 11, 2002); S. 2050 (introduced by Senators
Wellstone and Dayton on March 21, 2002); S. 2119, Reversing the Expatriation
of Profits Offshore Act (introduced by Senators Baucus and Grassley on April
11, 2002); H.R. 4756, Uncle Sam Wants You Act of 2002 (introduced by Representative
N. Johnson on May 16, 2002). Very generally, these bills would, if certain
conditions are met, treat the new foreign parent as a domestic corporation
for U.S. tax purposes, thus subjecting the worldwide earnings of the corporation
to U.S. taxation. Even the possibility of retroactive application exists.
For example, the bill introduced by Senators Wellstone and Dayton would
apply regardless of when the inversion transaction took place. In related
action on May 23rd, a number of U.S. Representatives introduced a bill (H.R.
4831) that would make U.S. companies that engaged in a corporate expatriation
transaction ineligible for federal contracts.
An inversion transaction occurs where a U.S. parent of a multinational
group becomes a subsidiary of an existing or newly-formed foreign company
located in a low tax or no tax jurisdiction, such as Bermuda. This type
of restructuring minimizes and sometimes eliminates U.S. taxation of the
group’s foreign source income.1
Inversions have been accomplished, in one form or another, by multinational
corporations such as McDermott, Inc., Helen of Troy, Inc., Triton Energy
Corporation, Fruit of the Loom, Inc., Tyco International, Ingersoll-Rand,
and Cooper Industries. The appeal of an inversion transaction is reflected
in a February 13, 2002 press release by Cooper Industries, in which its
chairman, president and chief executive officer stated that:
"We are excited about the opportunities presented by a Bermuda reincorporation
and are confident that it is in the best interests of our shareholders
and other constituencies. This change will enhance Cooper’s strategic
flexibility and our reduced global tax position will significantly increase
cash flow — enabling us to further strengthen our balance sheet and better
position us to pursue worldwide growth opportunities."2
Stanley Works, a Connecticut company whose Board of Directors approved
a plan to reincorporate in Bermuda on May 9th, has agreed not to proceed
with the reincorporation in response to a lawsuit filed by the State of
Connecticut’s Attorney General’s Office. Stanley Works’ Board of Directors
approved a revote on this issue.
In response to the attention surrounding corporate inversions, the U.S.
Treasury issued a Report3
which contains Treasury’s preliminary findings regarding inversion transactions.
While it recognizes the erosion of the U.S. corporate tax base caused by
inversion transactions, the Treasury Report, much to the disappointment
of some members of Congress, does not explicitly endorse the legislation
introduced to curb inversion transactions. Rather, the Treasury Report calls
for a broad response that involves a reexamination of the U.S. international
tax rules, including the differences in tax treatment of U.S. corporations
and foreign corporations, as well as the features of U.S. tax law that may
disadvantage U.S. based corporations in comparison to foreign based corporations.
Most significantly, the Treasury Report observes that the current legislative
efforts to curb inversion transactions are too narrowly focused, as there
are still other very significant planning opportunities that will remain
available to multinational corporations for purposes of reducing their U.S.
tax liability. Shortly thereafter, whether by coincidence or design, the
Tax Section of the New York State Bar Association released a lengthy report
agreeing with many aspects of the Treasury Report. Obviously, pressure is
building for some form of change.
On June 6th, the House Ways and Means Committee held a hearing on inversion
transactions. At the hearing, which ended after less than two hours of contentious
debate, the Bush Administration unveiled a set of legislative and regulatory
proposals. According to the Acting Assistant Treasury Secretary for Tax
Policy, Pamela Olson, these proposals "would go a long way to eliminate
the impetus for the inversion transactions," but, unlike the Congressional
proposals discussed above, would not impose a "complete block" or even a
"moratorium" on such transactions.
Notwithstanding increased scrutiny and proposed legislation (which may
or may not pass), opportunities still exist for multinationals to minimize
their global effective tax rates and costs. Greenberg Traurig has significant
experience designing and implementing international tax strategies for our
In addition, Greenberg Traurig’s legislative practice will monitor developments
in this and other areas of interest to our clients and friends. With the
fifth largest lobbying practice in terms of revenue, our Washington D.C.
government law practice is uniquely qualified to represent those with an
interest in tax legislative matters. Chaired by a former senior staff member
to the Chairman of the Senate Committee on Finance, Greenberg Traurig’s
government law practice group has a wealth of experience in lobbying Congress
on complicated and controversial tax matters.
1 Under current law addressing inversion transactions, U.S. tax
may be imposed either at the corporate or the shareholder level, depending
on how the transaction is structured. However, in troubled economic times,
where stock values are depressed, shareholders may have little or no gain
inherent in their stock, and corporations may have significant net operating
losses, such tax consequences could be minimized or altogether avoided.
Moreover, any adverse tax consequences resulting from the inversion transaction
itself are often considered justified by the future U.S. tax savings that
result from having the multinational group conduct its foreign business
operations under a foreign parent corporation.
2 Press Release, dated February 13, 2002, filed on SEC Form 425,
dated February 14, 2002.
3 Office of Tax Policy of the Department of Treasury, Corporate
Inversion Transaction: Tax Policy Implications (May 17, 2002).
© 2002 Greenberg Traurig
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This GT ALERT is issued for general purposes only and is not intended
to be construed or used as legal advice. Greenberg Traurig attorneys provide
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