GT Alert

Attack On U.S. Companies Moving Offshore

June 2002
By Stuart Anolik, Rob Bossart, Seth J. Entin and Ronald L. Platt

  View or download the PDF version of this Alert here.

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.

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 clients.

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.

Footnotes

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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