Corporate Inversions: Will the Repo Act Keep Corporations from Moving to Bermuda?

Posted: 6 Sep 2003

See all articles by Beckett G. Cantley

Beckett G. Cantley

St. Thomas University - School of Law

Abstract

In the wake of September 11, 2001, several influential lawmakers have questioned a tax reduction practice known as a "corporate inversion," calling the companies who undertake such an inversion "unpatriotic." A corporate inversion consists of forming a company in an offshore tax haven and then having the U.S.-based company become a subsidiary of the offshore company. The result is that the offshore taxing authority does not tax the offshore company on its profits and consequently, the U.S. company is not taxed on its offshore profits. In addition, the U.S.-based company may also undertake an "earnings stripping" program to have a significant portion of its U.S. generated income redirected to the non-taxable offshore company. On April 11, 2002, Chairman Max Baucus (D-Montana) and ranking minority member Charles E. Grassley (R-Iowa) released draft legislation in the Senate Finance Committee intended to combat corporate inversions.

The draft legislation, cited as the "Reversing the Expatriation of Profits Offshore Act" (hereinafter the "draft REPO Act"), would amend the Internal Revenue Code of 1986 ("Code") in several significant ways to prevent companies from setting up mailbox addresses in offshore tax havens to avoid paying substantial U.S. taxes. The draft legislation would require the Internal Revenue Service ("IRS"), in determining a company's tax liability, to focus on the location where the company is controlled after it sets up offshore operations. The draft REPO Act seeks to penalize two main types of companies: (1) those who undertake a "pure" (or nearly pure) inversion and (2) those who undertake a partial inversion. The events of September 11, 2001, the Enron bankruptcy, and the worsening deficit appear to have each contributed in putting the draft REPO Act on the front burner of the Senate Finance Committee, which has already reported the draft REPO Act to the full Senate. Currently, the draft REPO Act has been attached to the Charitable Aid, Recovery, and Empowerment Act of 2002 ("CARE Act") as a tax raising offset to the tax breaks contained in the CARE Act and awaits a full vote by the Senate. As such, it is an opportune time to analyze the draft REPO Act and determine whether it will successfully prevent company inversions.

Suggested Citation

Cantley, Beckett G., Corporate Inversions: Will the Repo Act Keep Corporations from Moving to Bermuda?. Available at SSRN: https://ssrn.com/abstract=434760

Beckett G. Cantley (Contact Author)

St. Thomas University - School of Law ( email )

16401 N.W. 37th Ave.
Miami, FL 33054
United States

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