September 11, 2014  |  

National Organizations Advocating Tax Fairness to Congress: Require Inverted Corporations to Pay Taxes Owed on Profits Held Offshore

(Washington, D.C.) With the pace of corporate inversions rapidly increasing and costing the U.S. billions in much-needed tax revenue, Citizens for Tax Justice and Americans for Tax Fairness call on Congress to require corporations that renounce their U.S. “citizenship” to pay any U.S. taxes owed on their profits held offshore.

Citizens for Tax Justice and Americans for Tax Fairness strongly support legislation introduced in May by Rep. Sander Levin (H.R. 4679) and Sen. Carl Levin (S. 2360) that would prevent inverted corporations from being treated as foreign companies. Important legislation introduced by Sens. Charles Schumer and Richard Durbin this week would prevent inverted companies from avoiding taxes on future profits through earnings stripping. But more action is needed. The measure we propose would complement these efforts by addressing another part of the problem: the ability of inverted corporations to avoid taxes on the profits they accumulated offshore before inverting.

This proposal would not be a new tax; it would simply require that a corporation pays U.S. income taxes that have been deferred on profits held offshore at the time the company renounces its American “citizenship.”

“This reform would remove significant incentives for corporate inversions and institute some level of fairness to the tax code by treating large corporations the same way that wealthy individuals are treated,” said Robert McIntyre, director of Citizens for Tax Justice.

Both individuals and corporations are allowed to defer paying U.S. taxes on key parts of their income, but wealthy individuals are required to give up this benefit when they renounce their American citizenship, while corporations are not. Wealthy individuals are allowed to defer paying income taxes on capital gains until they sell their assets. But upon renouncing their U.S. citizenship, they are required to give up that benefit and must pay tax on their unrealized capital gains.

Corporations, on the other hand, are allowed to defer paying income taxes on their offshore profits until those profits are officially brought to the United States, and continue to enjoy this benefit even after renouncing their U.S. citizenship. After becoming a foreign company for tax purposes, a corporation is likely to use accounting tricks to ensure those profits are never subject to U.S. taxes.

“Companies that desert America should have to pay what they already owe,” said Frank Clemente, executive director of Americans for Tax Fairness. “This pay what you owe when you go tax is only fair. Corporations should not be able to dodge their responsibilities merely by declaring that they are no longer American.”

Deferral of U.S. tax on offshore corporate profits is a tax break benefitting American multinational corporations, supposedly to help them compete with corporations based in other countries. It makes sense to require corporations to give up this benefit when they declare that they are no longer American.

This is especially true now, when many corporations invert and declare themselves foreign companies to dodge paying their fair share of taxes even though little or nothing about the business or its ownership actually changes. They continue to house their executive staff at the same U.S. address, meet in boardrooms at the same U.S. address, market to and earn profits from U.S. consumers in much the same way, but when it comes time to pay taxes, they claim a foreign address.

“There are numerous problems with the U.S. corporate tax code,” McIntyre said. “But if we wait for Congress to enact a sweeping reform to try to fix all these problems, there won’t be much of a corporate tax left. Corporate inversions must be stopped right now.”

A background paper providing more details on this proposal is available here.