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US House Democrats Propose Corporate Exit Tax

by Mike Godfrey, Tax-News.com, Washington

04 May 2016


A bill has been introduced by Lloyd Doggett (D – Texas), a senior member of the US House Ways and Means Committee, with the support of 50 other Democrat Representatives, to impose an exit tax on corporations that undertake corporate tax inversions or otherwise renounce their American citizenship.

Inversion techniques are being used by some US multinationals to move their tax residences abroad – away from the high 35 percent US headline federal corporate tax rate – and to unlock their unrepatriated earnings held offshore (on which, under US tax rules, tax is imposed only when the income is brought back to the United States).

The Corporate EXIT Fairness Act (Corporate EXpatriates and Inverters Tax Fairness Act) would make it more difficult for firms to avoid paying US taxes. The exit tax is said to be "analogous to a tax wealthy expatriating individuals owe when they renounce their US citizenship." Democratic Party presidential candidate Hillary Clinton has proposed a similar measure, and it has also been the subject of legislation recently introduced in the US Senate.

The exit tax proposed in Doggett's bill would have to be paid on all of a US multinational's deferred overseas profits before reincorporating in a new country. It would be the greater of two calculations: the tax owed on the accumulated deferred foreign income of the multinational's controlled foreign corporations (CFCs), or a tax on the appreciation in value of the CFCs.

The House bill differs from the proposed Senate legislation in that it also incorporates changes previously included in the Stop Corporate Inversions Act. These measures would include raising the minimum threshold for the percentage of shareholders of the new company who were shareholders of the foreign company (with which the US company is merging) from 20 percent to 50 percent, and adding a management-and-control test.

TAGS: tax | business | law | mergers and acquisitions (M&A) | corporation tax | multinationals | controlled foreign corporations (CFC) | legislation | transfer pricing | United States | tax breaks | exit tax | Tax

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