NU Online News Service, June 21, 11:15 a.m. — Washington

The Senate Finance Committee has approved a bill aimed at preventing a much-publicized method used by some U.S. corporations to avoid U.S. taxes.

The bill, S. 2119, seeks to stop U.S. corporations from moving their corporate charters to low-tax jurisdictions outside the United States, through a process known as “corporate inversion.”

The bill, which is co-sponsored by Finance Committee Chairman Max Baucus, D-Mont., and Ranking Republican Chuck Grassley, R-Iowa, was passed by a voice vote.

The legislation applies only to companies that seek to renounce their U.S. citizenship. The legislation does not apply to companies that originated in so-called tax havens, such as Bermuda.

Under S. 2119, two types of inversions are addressed.

A pure inversion is defined as one in which a U.S. company becomes the subsidiary of a foreign corporation or transfers substantially all of its properties to a foreign corporation.

In addition, the shareholders of the U.S. corporation receive 80% or more of the vote or value of the foreign corporation immediately and the foreign corporation does not have substantial business activities in the country of incorporation.

For this type of inversion, the new foreign parent would be deemed a domestic corporation for U.S. tax purposes.

A limited inversion is defined as one that is similar to a pure inversion, except that the shareholders of the U.S. corporation end up with more than 50% but less than 80% of the stock of the foreign corporation.

For this type of inversion, the tax imposed on the untaxed earnings and appreciation in value of foreign properties could not be reduced by any corporate tax credit or other means.

In addition, limited inversion structures would be monitored to assure that income cannot be stripped out of the U.S. corporation through transactions with foreign related parties.

Grassley says the legislation is aimed at assuring fairness.

“The average individual taxpayer can’t skip out on his tax bill,” he says. “He doesn’t have the luxury of setting up a filing cabinet and a mail box overseas to escape his federal taxes. The same should be true for corporations.”