Opening Statement of the Hon. Scott McInnis, a Representative in Congress from the State of Colorado
Hearing on Corporate Inversions
June 6, 2002
Mr. Chairman, thank you for holding this hearing on inversions, transactions where companies reincorporate offshore to avoid both U.S. domestic and worldwide taxation. I am excited by the opportunity to bring these issues out into the open and hear from today's witnesses. I especially look forward to working with the Treasury Department and the Committee to address the plague of inversions that has visited itself on our country.
Near the beginning of the year, I first became aware of inversion transactions, and frankly became incensed. On March 6 of this year I introduced H.R. 3857, the first legislative proposal designed to target inversion transactions. My proposal would treat inverted companies as U.S. companies, ignoring the paper-thin transaction designed to avoid taxes. This bill has bipartisan support, including support from a number of Members of this Ways and Means Committee, including Rep. Nancy Johnson (CT). I also cosponsored H.R. 4756, Representative Nancy Johnson's bill that she introduced to impose a moratorium on these inversion transactions. It is clear that this is not a partisan issue, but rather an issue of policy, and I plan to work with Members like Representative Nancy Johnson to target these transactions.
My bill sets up a two-level test. The first is a clear bright line test based on a high level of stock ownership by the same owners following the inversion. The second, involves a lower level of ownership following the inversion, and sets out a three part test to distinguish transactions with little substance. The effective date on this legislation includes transactions completed on or after January 1, 2002. That date was not designed to include or exclude any particular company, but rather reflected fair warning to every company contemplating these tax avoidance techniques. Both ownership levels set out in my legislation involve clear rules, and if a corporation meets either test, the inversion will be essentially ignored and the corporation treated as a domestic corporation. The bottom line is that this bill takes away the tax incentive to undertake this complicated transaction -- and that is the only reason these companies are doing it.
The fact is that, as I have told others, I believe my legislation is a good proposal, but I have worked to refine and revise it to ensure there are no loopholes or blind spots in the proposal. Moreover, as I have learned more about these transactions, I have become convinced that earnings stripping of U.S. earnings is perhaps the most significant factor that allows for tax avoidance of U.S. taxes. I will continue to look into these complex transactions and work to refine and revise my proposal as new information yields new facets of these transactions.
A tax partner for a leading accounting firm, Ernst & Young, commenting on the current climate regarding inversions, noted that "we are working through a lot of companies who feel that it is, that just the improvement on earnings is powerful enough that maybe the patriotism issue needs to take a back seat to that." I cannot disagree with this sentiment strongly enough. I cannot help but view this issue as a patriotic issue; this country provides tremendous liberties and protections to the employees of the companies that invert and the individuals who run these companies. We have a right to expect that everyone shoulders a fair share of the burden. Avoiding taxes just shifts the burden from these companies to every other American. Focus for a moment on the young men and women who are now fighting the War on Terrorism in Afghanistan and elsewhere. I would like to think that their efforts and possibly lives are being risked for freedoms that are not callously taken for granted. Of course these companies should preserve American jobs, but tax avoidance is not the way.
To give you some perspective from the common man, as I have traveled Colorado discussing this issue, I have had small business owners ask me how they can reduce their effective tax rates by 10%, like the inverted companies do. You're out of luck, I tell them, you can't do it. I have supported legislation that gives these small businesses lower tax rates. I am all for reducing the taxpayers' burden, but for everyone, not just the select few companies that have little concern for the sacrifices made by many to allow us the freedoms we hold dear.
Many have noted that inversions are a symptom of the U.S. tax code's flaws, especially our international tax provisions, which I agree are tremendously complex and burdensome. Many of the companies which have chosen to turn their back on this country argue that the tax code drove them to take the action. One response has been that the U.S. international tax system should be reformed to address the complexity and fairness of the Internal Revenue Code and address the problem.
The way I view this issue is best illustrated by considering a person who has a bucket that has sprung leaks. The first thing you do is plug the leaks, then you work on how to get a new bucket and make decisions about what kind of bucket to get. I propose to plugs the leaks in our international tax system that are inversions, and I agree we can and should work on fixing the larger and more complicated problem of how the tax code's complexity could lead to inequities and make the U.S. tax system less competitive.
I would also like to address the notion that companies filing papers in another country, with no other connection to that country, is similar to U.S. companies choosing to incorporate in Delaware. A Colorado company can incorporate in Delaware, and take advantage of Delaware's sophisticated corporate laws and rules, but it cannot altogether avoid its taxes by shifting income or debt between the two locations. That is what is occurring here, these companies are using the place of incorporation to avoid paying U.S. tax on worldwide income, and then, incredibly enough, by using it to avoid paying U.S. tax on U.S. income. Most of these companies will not pay any taxes on that income they shift abroad, and that is a far cry from a Colorado company incorporating in Delaware.
The U.S. respects the place of incorporation, as a rule. But when you stretch the boundaries of credibility, then there is no reason the U.S. has to respect a paper transaction that has little to do with reality. For example, the British system gives their tax authority the power to go after a company that uses an incorporation to avoid British law. If the British can apply some common sense to these types of transactions, I do not see why the United States has to turn a blind eye to the problem.
There is a long held principle in the tax area that looks through the form of a transaction to the substance, and in these cases the substance is that these are still U.S. companies in location, business decisions, and every substantial matter except a filing cabinet and post office box located elsewhere.
Finally, I was very pleased that the Treasury Department was able to produce its report in such a short time period. The Bush Administration has taken these transactions seriously, and worked to produce a meaningful look at the transactions and the causes and possible cures. In that report, the Treasury Department noted that earnings stripping is a very significant component of these transactions; I don't think our current limitations on earnings stripping are working well, otherwise, why would these companies takes these steps to take advantage of the transaction. I have heard some say that "the U.S. company is not reducing its U.S. taxes, it is just attempting to level the playing field." Well, that statement is absolutely wrong, the transaction allows these companies to cut their U.S. taxes by a significant amount -- these U.S. companies avoid worldwide taxes and also U.S. taxes after inverting.
In conclusion, I very much appreciate the Chairman scheduling today's hearing on inversions. This is an important issue for the Ways and Means Committee to consider. This is not a partisan issue, it is an issue of how to ensure our tax laws are applied in a fair and consistent manner -- to everyone. I look forward to the testimony and to addressing this problem.
Background Description of H.R. 3857
1) The parent of a U.S. corporation that inverts will continue to be deemed to be a domestic corporation, despite the transaction, if the former owners of the domestic U.S. corporation continue to hold 80% of the parent immediately following the inversion.
50%-80% Level of Ownership
2) If the former U.S. owners control more than 50% and less than 80% of the parent following the inversion, and the following triggers are met:
then under the McInnis proposal, the parent of the U.S. corporation will continue to
be deemed a domestic corporation for the purposes of U.S. tax laws.
The effective date on this legislation includes transactions completed on or after January 1, 2002.