Rep. Sander Levin, D-Mich., the ranking Democrat on the House Ways and Means Committee, introduced legislation to limit two tax strategies used by some foreign-controlled U.S. multinational corporations, known as “hopscotching” and “de-controlling.”
The Protecting the U.S. Corporate Tax Base Act of 2016 is the third in a series of bills introduced by Levin and other House Democrats to curb various corporate tax strategies such as inversion.
“Americans believe that the tax code is rigged against them, and when companies can use complicated loopholes to avoid paying their fair share of taxes, they’re not wrong,” Levin said in a statement.
One of the tax strategies targeted by the legislation, “hopscotching,” allows a foreign parent company or foreign affiliate to lend the tax-deferred overseas earnings of foreign subsidiaries of U.S. companies, known as controlled foreign corporations, or CFCs, to non-CFC foreign affiliates. The borrowed funds can then be used to repay debt, make capital investments in the U.S. and elsewhere, purchase the stock of a related domestic or foreign corporation, or make dividend payments to shareholders. CFCs can thus circumvent a rule in Section 956 of the Tax Code that was intended to prevent the use of a CFC’s untaxed earnings for direct investments in the U.S. without incurring U.S. tax.
The legislation would end this tax strategy by providing that a U.S. shareholder’s gross income includes not only a pro rata share of any increase in the CFC’s investment of earnings in “United States property,” but also a pro rata share of any increase in the CFC’s investment of earnings in “foreign group property.
The second tax strategy, “de-controlling,” enables foreign-controlled U.S. multinational groups to avoid U.S. taxes on the deferred earnings of CFCs by reducing the U.S. ownership of CFCs just below the level that subjects the foreign subsidiaries to U.S. taxation.
The term “controlled foreign corporation” is defined as any foreign corporation if more than 50 percent of its stock is owned by U.S. shareholders. To “de - control” a controlled foreign corporation, a non-CFC foreign affiliate can transfer sufficient amount of property to the CFC in exchange for 50 percent or more of the CFC stock . The result is that the foreign corporation is no longer a “controlled ” foreign corporation. Once a CFC is “de-controlled,” it is free to make direct investments in United States property without triggering U.S. taxes.
The bill would close this loophole by providing that the stock of a foreign corporation owned by a foreign person is attributed to a related United States person for purposes of determining whether the related U.S. person is a “United States shareholder” of the foreign corporation, and therefore, whether the foreign corporation is a “controlled foreign corporation.”
The Treasury Department issued temporary regulations in April to prevent “hopscotching” by inverted companies. The “hopscotching” provision in the Protecting the U.S. Corporate Tax Base Act of 2016 is broader and would apply to U.S. companies that have inverted, along with U.S. multinational companies that have been acquired by foreign companies. The “de-controlling” provision was included in President Obama’s fiscal year 2016 and 2017 budget proposals.
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