Corporate Expatriation, Inversions, and Mergers: Tax Issues

May 27, 2014 – June 17, 2021 R43568

Corporate Expatriation, Inversions, and
June 17, 2021
Mergers: Tax Issues
Donald J. Marples
News reports in the late 1990s and early 2000s drew attention to a phenomenon sometimes called
Specialist in Public Finance
corporate “inversions” or “expatriations”: instances where U.S. firms reorganize their structure so

that the “parent” element of the group is a foreign corporation rather than a corporation chartered
Jane G. Gravelle
in the United States. The main objective of these transactions was tax savings, and they involved
Senior Specialist in
little to no shift in actual economic activity. Bermuda and the Cayman Islands (countries with no
Economic Policy
corporate income tax) were the locations of many of the newly created parent corporations.

These types of inversions largely ended with the enactment of the American Jobs Creation Act of

2004 (JOBS Act; P.L. 108-357), which denied the tax benefits of an inversion if the original U.S.
stockholders owned 80% or more of the new firm. The act effectively ended shifts to tax havens where no real business
activity took place.
However, two avenues for inverting remained. The act allowed a firm to invert if it has substantial business operations in the
country where the new parent was to be located; the regulations at one point set a 10% level of these business operations.
Several inversions using the business activity test resulted in Treasury regulations in 2012 that increased the activity
requirement to 25%, effectively closing off this method. Firms could also invert by merging with a foreign company if the
original U.S. stockholders owned less than 80% of the new firm. If the original U.S. shareholders owned less than 60%, the
firm was not considered as inverting.
Two features made a country an attractive destination: a low corporate tax rate and a territorial tax system that did not tax
foreign source income. The U.K. joined countries such as Ireland, Switzerland, and Canada as targets for inverting when it
adopted a territorial tax in 2009. At the same time, the U.K. also lowered its rate (from 25% to 20% by 2015). Inverted firms
could reduce worldwide taxes by stripping taxable earnings out of the new U.S. subsidiary, largely through allocating debt to
that subsidiary.
Soon after, several high-profile companies indicated an interest in merging with a non -U.S. headquartered company,
including Pfizer, Chiquita, AbbVie, and Burger King. This “second wave” of inversions again raised concerns about an
erosion of the U.S. tax base. Chiquita and AbbVie canceled their plans in the wake of 2014 Treasury regulations, but Burger
King and other firms completed merger plans. Pfizer subsequently terminated its planned merger with Allergan after
Treasury regulations issued in 2016. Evidence suggests that these Treasury regulations have been an important factor in
subsequently decreasing these merger-related inversions.
Two policy options had been discussed in response: a general reform of the U.S. corporate tax and specific provisions to deal
with tax-motivated international mergers. In December 2017, P.L. 115-97 (popularly known as the Tax Cuts and Jobs Act)
lowered the corporate tax rate as part of broader tax reform, which some argued would slow the rate of inversions. Other tax
reform proposals suggested that if the United States moved to a territorial tax, the incentive to invert would be eliminated.
There were concerns that a territorial tax could worsen the profit-shifting that already exists among multinational firms. P.L.
115-97, while moving in some ways to a territorial tax, also instituted a number of measures aimed at combatting profit
shifting, including a global minimum tax on intangible income that limited the tax benefits of a territorial tax.
The second option is to directly target inversions. The 2017 act included several provisions that discouraged inversions. In
addition, further anti-inversion provisions have been introduced, most recently S. 714, S. 991, S. 1501, H.R. 1785, and H.R.
2976 in the 117th Congress. The Biden Administration’s FY2022 budget proposal also includes a provision to treat all firms
in which former U.S. shareholders have more than 50% ownership (or in which management and control is in the United
States) as U.S. firms. S. 714, S. 991, H.R. 1785, and the budget proposal also provide that debt could be allocated to the U.S.
member of a worldwide operation in proportion to the U.S. ownership of assets, and contain other provisions that may lead to
a need for stricter anti-inversion rules.
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Corporate Expatriation, Inversions, and Mergers: Tax Issues

Introduction
The U.S. corporate income tax is based on worldwide economic activity. If al of a corporation’s
economic activity is in the United States, then tax administration and compliance is relatively
straightforward. Many corporations, however, operate in several jurisdictions, which creates
complications for tax administration and compliance. Further, corporations may actively choose
where and how to organize to reduce their U.S. and worldwide tax liabilities. Some of these
strategies have been referred to as expatriation, inversions, and mergers.1
This report begins with a brief discussion of relevant portions of the U.S. corporate income tax
system before examining how inversions were commonly structured. The report then looks at
how Congress and the Department of the Treasury have reduced the benefits of inversions. The
report concludes with an examination of remaining methods for inverting and policy options
available to prevent or limit these inversions.
Achieving tax savings using an inversion became more difficult with the enactment of the
American Jobs Creation Act of 2004 (JOBS Act; P.L. 108-357). The JOBS Act denied or
restricted the tax benefits of an inversion if the owners of the new company were not substantial y
different from the owners of the original company. The act also al owed a firm to invert only if it
had substantial business operations in the country where the new headquarters was to be located.
Although the 2004 legislation largely prevented the types of inversions that drew attention prior
to its adoption, several companies have successfully inverted in the past few years by using the
substantive business operations mechanism or merging.2 Treasury regulations have subsequently
limited the former mechanism.3
In spring 2014, several high-profile companies indicated an interest in merging or plans to merge
with a non-U.S. firm, including Pfizer,4 Chiquita,5 and Omnicom (an advertising firm).6 News

1 For a law review article that reviews inversions and their development in detail, see Cathy Hwang, “T he New
Corporate Migration: T ax diversion T hrough Inversion,” Brooklyn Law Review, vol. 80, no. 3, (2015), pp. 807-856,
https://www-cdn.law.stanford.edu/wp-content/uploads/2015/09/Inversions-final.pdf. For a detailed list of inversions
from 1982 through 2016, see Arjen H. L. Slangen, Marc Baaij and Riccardo Valboni, “Disaggregating the Corporate
Headquarters: Investor Reactions to Inversion Announcements by US Firms,” Journal of Management Studies, July 3,
2017.
2 John D. McKinnon and Scott T hurm, “U.S. Firms Move Abroad to Cut T axes: Despite ’04 Law, Companies
Incorporate Overseas, Saving Big Sums on T axes,” Wall Street Journal, August 28, 2012, http://online.wsj.com/news/
articles/SB10000872396390444230504577615232602107536?mod=WSJ_business_LeadStoryCollection&mg=
reno64-sj&url=
http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10000872396390444230504577615232602107536.html%3Fmod
%3DWSJ_business_LeadStoryCollection; Bret Wells, “ Cant and the Inconvenient T ruth about Corporate Inversions,”
Tax Notes, July 23. 2012, pp. 429-439; Reuven S. Avi-Yonah, “ T erritoriality: For and Against,” Tax Notes
International, May 13, 2013, pp. 661-663.
3 T reasury Decision, T .D. 9592, July 12, 2012.
4 Pfizer failed in its initial bid to acquire Astra-Zeneca. Inyoung Hwang, “AstraZeneca Bullish Options Gain on Pfizer
Comeback Bets,” Bloomberg News, September 2, 2014, http://www.bloomberg.com/news/2014-09-02/astrazeneca-
bullish-options-gain-on-pfizer-comeback-bets.html.
5 A company may invert even if it does not currently expect to pay U.S. tax. See 10K Filing of Chiquita Brands
International, Inc. to the Securities and Exchange Com m ission, March 31, 2009.
6 Omnicom has abandoned its proposed merger. See David Gelles, “At Odds, Omnicom and Publicis End Merger,”
May 8, 2014, New York Tim es, http://dealbook.nytimes.com/2014/05/08/ad-agency-giants-said-to-call-off-35-billion-
merger/.
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Corporate Expatriation, Inversions, and Mergers: Tax Issues

reports indicated that a group of Walgreens investors was also urging such a move.7 Although the
Pfizer and Omnicon mergers and Walgreens headquarters shifts ultimately did not take place,
other firms announced mergers in the late spring and early summer. A number of firms in the
medical device or pharmaceuticals fields announced mergers or proposed mergers with a shift of
headquarters: Medtronics,8 Salix,9 AbbVie,10 Mylan,11 and Hospira.12 In August 2014, concern
about inversions increased with the announcement that Burger King was in talks to merge with
Tim Hortons, a Canadian firm, with the merged firm’s headquarters in Canada.13 An agreement
was announced on August 26. Although Burger King is a smal er firm than AbbVie, for example,
it is a household name and this proposed inversion garnered much attention.
In September 2014, the Treasury Department released a notice of regulatory changes that would
restrict some aspects of inversions or their benefits and indicated that other actions may follow. 14
AbbVie, Chiquita, and some other firms canceled their plans in the wake of these Treasury
regulations, although new merger proposals were also announced.15 In November 2015, the
Treasury announced additional regulatory restrictions.16 Although new inversions slowed
significantly, others continued but in many cases have been structured to avoid the regulations by
reducing ownership below 60%. Most notable of these is the proposed merger of Pfizer with
Al ergan in November 2015. Pfizer terminated the merger after the release of the April 4, 2016,
regulations.17

7 Ameet Sachdev and Peter Frost,” Walgreen Pressured T o Move Headquarters T o Europe,” Chicago Tribune, April
14, 2014, http://articles.chicagotribune.com/2014-04-14/business/chi-walgreens-headquarters-to-europe-
20140414_1_walgreen-co-tax-rate-tax-deals.
8 David Gelles, “In Medtronic’s Deal for Covidien, an Emphasis on T ax Savings,” New York Times Dealbook, June 16,
2014, http://dealbook.nytimes.com/2014/06/16/in-medtronics-deal-for-covidien-an-emphasis-on-tax-savings/?_php=
true&_type=blogs&_r=0.
9 Simeon Bennett and Alex Wayne, “Salix to Merge With Cosmo in Latest T ax Inversion Deal,” Bloomberg, July 9,
2014, http://www.bloomberg.com/news/2014-07-08/salix-to-merge-with-cosmo-in-latest-tax-inversion-deal.html.
10 Nathan Vardi, “AbbVie T o Buy Shire For $54 Billion In Biggest Inversion Deal Ever,” Forbes, July 18, 2014,
http://www.forbes.com/sites/nathanvardi/2014/07/18/abbvie-to-buy-shire-for-54-billion-in-biggest-inversion-deal-ever/
.
11 Ronald Barusch, “Dealpolitik: Mylan’s Simpler Inversion Structure Could Set T rend,” Wall Street Journal, July 16,
2014, http://blogs.wsj.com/moneybeat/2014/07/16/dealpolitik-mylans-simpler-inversion-structure-could-set-trend/.
12 David Gelles, “Drug Maker Hospira and France’s Danone in T alks on $5 Billion Inversion Deal,” New York Times
Dealbook, July 27, 2014, http://dealbook.nytimes.com/2014/07/27/hospira-and-danone-in-talks-on-5-billion-inversion-
deal/?_php=true&_type=blogs&_r=0.
13 Liz Hoffman and Dana Mattioli, “Burger King in T alks to Buy T im Hortons in Canada T ax Deal: T ie -Up Would Be
Structured as T ax Inversion With a Combined Market Value of About $18 Billion,” Wall Street Journal, August 25,
2014, http://online.wsj.com/articles/burger-king-in-talks-to-buy-tim-hortons-1408924294.
14 U.S. Department of T reasury, “ Rules Regarding Inversions and Related T ransactions,” T reasury Notice 2014-52,
September 22, 2014. See also the T reasury, “ Fact Sheet: T reasury Actions to Rein in Corporate T ax Inversions, ” press
release, September 22, 2014, at http://www.treasury.gov/press-center/press-releases/Pages/jl2645.aspx.
15 See Kevin Drawbaugh, Factbox: “Another U.S. T ax ‘Inversion’ Implodes, Pending Deals Dwindle,” Reuters,
October 24, 2014, at http://www.reuters.com/article/2014/10/24/us-usa-tax-pending-inversions-
idUSKCN0ID1VR20141024, and Andrew Pollack, “ Wright Medical Will Merge With T ornier in All-Stock Deal,”
Bloom berg, October 28, 2014, http://www.bloomberg.com/news/2014-10-27/wright -medical-will-merge-with-tornier-
in-all-stock-deal.html.
16 T reasury Notice 2015-79. See T reasury’s press release at https://www.treasury.gov/press-center/press-releases/Pages/
jl0282.aspx and U.S. Department of the Treasury, “ Fact Sheet: T reasury Issues Inversion Regulations and Proposed
Earnings Stripping Regulations,” press release, April 4, 2016, at https://www.treasury.gov/press-center/press-releases/
Pages/jl0404.aspx. Final regulations on debt -equity were issued on October 21, 2016, T reasury Decision 9790,
https://www.irs.gov/irb/2016-45_IRB/ar09.html.
17 T reasury Notice 2015-79. See T reasury’s press release at https://www.treasury.gov/press-center/press-releases/Pages/
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Corporate Expatriation, Inversions, and Mergers: Tax Issues

This “second wave” of inversions again raised concerns about an erosion of the U.S. tax base.
While the substantial business avenue appears to have been largely eliminated by Treasury
regulations that increased the required share of activity, the option of merging with a smal er
foreign company remains. U.S. firms may also merge with larger firms, although in this case the
tax benefits are less likely to be key factors in the decision to merge.
Data released by the Bureau of Economic Analysis indicated that acquisitions by foreigners,
which rose substantial y in 2015, fel by 15% in 2016, and by 32% in 2017. Some of the largest
declines were in countries associated with inversions, such as Ireland, where acquisitions fel
from $176 bil ion in 2015, to $35 bil ion in 2016, and to $7 bil ion in 2017.18 In December 2017,
a tax revision (P.L. 115-97), often cal ed the Tax Cuts and Jobs Act (TCJA), and subsequently
referred to as the “Act,” made major changes to the corporate tax and the international tax rules,
along with some specific revisions aimed at discouraging inversions.19 Although data for 2018 are
not yet available, one planned inversion, by Assurant, Inc., was revised to retain the headquarters
in the United States.20 Ohio-based Dana, Inc. announced plans to merge and move the
headquarters to the U.K., although the merger would leave the U.S. shareholders with less than
60% ownership, and therefore not make them subject to anti-inversion penalties.21
Total business acquisitions remained stable between 2017 and 2018, but dropped by close to 30%
between 2018 and 2019, with significant declines in Ireland and the Netherlands.22 Evidence from
another data source indicated that foreign acquisitions of U.S. firms dropped by 25% in 2018 and
2019, compared to 2016 and 2017, while U.S. acquisitions of foreign firms rose by 50%. The
author attributed this change to other provisions of the 2017 Act.23
U.S. International Tax System
The United States uses a system that taxes both the worldwide income of U.S. corporations and
the income of foreign firms earned within U.S. borders. Al income earned within U.S. borders is

jl0282.aspx and U.S. Department of the Treasury, “ Fact Sheet: T reasury Issues Inversion Regulations and Proposed
Earnings Stripping Regulations,” April 4, 2016, at https://www.treasury.gov/press-center/press-releases/Pages/
jl0404.aspx.
18 See Bureau of Economic Analysis, “New Foreign Direct Investment in the United States: 2017,” news release, July
11, 2018, https://www.bea.gov/news/2018/new-foreign-direct-investment -united-states-2017. See also Andrew Velarde
and Zoe Sagalow, “As Inversions Dried Up, Foreign Direct Investment Fell in 2016,” Tax Notes, July 24, 2017,
pp.430-431.
19 T he original title of the law, the T ax Cuts and Jobs Act, was stricken before final passage because it violated what is
known as the Byrd rule, a procedural rule that can be raised in the Senate when bills, like the tax bill, are considered
under the process of reconciliation. T he actual title of the law is “ T o provide for reconciliation pursuant to titles II and
V of the concurrent resolution on the budget for fiscal year 2018. ” For more information on the Byrd rule, see CRS
Report RL30862, The Budget Reconciliation Process: The Senate’s “Byrd Rule”, by Bill Heniff Jr.
20 See “Assurant and T he Warranty Group Amend Deal Structure,” Business Wire, January 9, 2018, at
https://www.businesswire.com/news/home/20180109005906/en/Assurant -Warranty-Group-Amend-Deal-Structure.
21 Chester Dawson and T heo Francis, “Despite U.S. T ax Overhaul, Ohio -Based Dana Considers a Move Abroad,” Wall
Street Journal, March 9, 2018, https://www.wsj.com/articles/dana-to-take-over-gkns-automotive-driveline-business-
1520614366.
22 U.S Bureau of Economic Analysis, International Data, Balance of Payments and Direct Investment Position Data
Foreign Direct Investment in the U.S. Equity Inflows Other than Reinvestment of Earnings By Country Only,
https://apps.bea.gov/itable/index.cfm.
23 Andrew Lyon, “Insights on T rends in U.S. Cross-Border Mergers and Acquisitions After the T ax Cuts and Jobs Act,”
Tax Notes, October 2, 2020, pp.497-507.
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taxed the same—in the year earned and at statutory tax rates of 21% (reduced from 35% by the
Act).
Under pre-Act law, U.S. corporate income earned outside the United States was also subject to
U.S. taxation, though not necessarily in the year earned. This treatment occurred because U.S.
corporations could defer U.S. tax on active income earned abroad in foreign subsidiaries until it
was paid, or repatriated, to the U.S. parent company as a dividend.24 To mitigate double taxation,
tax due on repatriated income was reduced by the amount of foreign taxes already paid.
The Act substituted a new system (Global Intangible Low-Taxed Income, or GILTI) that taxed
foreign source income of U.S. subsidiaries currently but with an exemption for a deemed return
of 10% on tangible assets and a deduction from the remaining income (for 50% of income
through 2025 and 37.5% afterward). It al ows a credit for 80% of foreign taxes. The new system
also al ows U.S. firms a deduction for foreign derived intangible income, or FDII, which was
designed to reduce tax rates on foreign earnings from the use of intangible assets held in the
United States. The deduction is 37.5% of this estimated income through 2025 and 21.875%
afterward.25
Income from certain foreign sources earned by subsidiaries—which general y includes passive
types of income, such as interest, dividends, annuities, rents, and royalties, and is referred to as
Subpart F income—is general y taxed in the year it is earned and was retained by the Act. Subpart
F applies only to shareholders who may be able to influence location decisions at the corporate
level.26 These subsidiaries are referred to as controlled foreign corporations (CFCs).
The Act also adopted the Base Erosion and Anti-Abuse tax (BEAT), an alternative minimum tax
with the tax based increased by certain payments to related foreign parties. Its primary focus was
to address profit shifting between foreign parents and U.S. subsidiaries, but it applies in general.
Notably, it excludes payments for costs of goods sold and for costs of services under some pricing
rules.
One way of shifting profits was to locate debt in high-tax countries. Preexisting thin capitalization
rules limited interest to 50% of earnings before the deduction of interest, taxes, and amortization,
depreciation, and depletion (EBITA), although firms with a debt-to-asset rate of 1.5 or less were
exempt. The new law adopted much stricter thin capitalization rules to prevent firms from
deducting large amounts of interest. The new law lowers the cap to 30% of profits, eliminates the
exemption based on the debt-to-asset ratio and, after 2021, measures the cap as a share of profits
after amortization, depreciation, and depletion deductions.
The Act also adopted some tax provisions targeted at discouraging inversions, which are
discussed subsequently.

24 CRS Report R40178, Tax Cuts on Repatriation Earnings as Economic Stimulus: An Economic Analysis, by Donald J.
Marples and Jane G. Gravelle. Income from branches and passive income earned directly, such as interest and royalties,
is taxed currently.
25 See CRS Report R45186, Issues in International Corporate Taxation: The 2017 Revision (P.L. 115 -97), by Jane G.
Gravelle and Donald J. Marples for a discussion of this new law and how it compares to prior law.
26 T hese stockholders are defined as owning at least 10% of a subsidiary’s stock and only subsidiaries that are at least
50% owned by 10% U.S. stockholders.
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Corporate Expatriation, Inversions, and Mergers: Tax Issues

Anatomy of an Inversion
A corporate inversion is a process by which an existing U.S. corporation changes its country of
residence. After the inversion, the original U.S. corporation becomes a subsidiary of a foreign
parent corporation. Corporate inversions occur through three different paths: the substantial
activity test, merger with a larger foreign firm, and merger with a smal er foreign firm.27
Regardless of the form of the inversion, the typical result is that the new foreign parent company
faces a lower home country tax rate and no tax on the company’s foreign-source income.28
The U.S. firm can use inversions to reduce taxes using various techniques. Foreign operations in
the future can be formed as subsidiaries of the new foreign parent in a country with a territorial
tax, so that future foreign income can be exempt from tax. Accumulated and future foreign
income from the U.S. company’s foreign subsidiaries (which would be taxed by the United States
if paid to the parent as a dividend) may be effectively repatriated tax free by lending or otherwise
investing in the related foreign firm, such as a low-interest loan to the foreign parent holding
company. These borrowed funds could then be used, for example, to pay dividends to
shareholders or make loans to the U.S. firm.29
In addition, the combined firm can engage in “earnings stripping”: reducing income in the U.S.
firm by borrowing from the U.S. company and increasing interest deductions.30 For example, a
foreign parent may lend to its U.S. subsidiary. This intercompany debt does not alter the overal
company’s debt, but does result in an interest expense in the United States (which reduces U.S.
taxes paid) and an increased portion of company income being “booked” outside the United
States. Royalty payments, management fees, and transfer pricing arrangements are other avenues
for earnings stripping, but are thought to be of lesser importance than intercompany debt.31
Substantial Business Presence
In this form of inversion, a U.S. corporation with substantial business activity in a foreign
company creates a foreign subsidiary. The U.S. corporation and foreign subsidiary exchange
stock—resulting in each entity owning some of the other’s stock. After the stock exchange, the
new entity is a foreign corporation with a U.S. subsidiary, as the exchange is general y in
proportion to the respective company valuations. As this form of inversion does not require any
change in the effective control of the corporation, it is referred to as a “naked inversion.”

27 T he techniques corporations use to invert —stock-for-stock inversions, asset transfers, or drop-down inversions—
apply to all forms of inversions. In drop-down inversions, assets are transferred to the new parent, and some of those
assets are transferred to a domestic subsidiary.
28 William McBride, Corporate Exits Accelerating, Taking Jobs with Them , T ax Foundation, April 25, 2014,
http://taxfoundation.org/blog/corporate-exits-accelerating-taking-jobs-them.
29 T he U.S. firm cannot shift its existing foreign subsidiaries to the new parent without paying a corporate level tax,
although it might be able to transfer intangible assets of the U.S. firm or its subsidiaries at a below market price.
30 U.S. Department of T reasury, Report to Congress on Earnings Stripping, T ransfer Pricing and U.S. Income T ax
T reaties, November 2007.
31 U.S. Congress, House Committee on Ways and Means, Statement of Pamela F. Olson, Acting Assistant Secretary for
Tax Policy, Hearing on Corporate Inversions, 107 th Cong., 2nd sess., June 6, 2002.
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U.S. Corporation Acquired by a Larger Foreign Corporation
In this form of inversion, a U.S. corporation would like to bolster its foreign operations and,
perhaps, lower its U.S. tax. To do so, the U.S. corporation merges with a larger foreign
corporation, with the U.S. shareholders owning a minority share of the new merged company.
This results in the effective control of the new company being outside U.S. borders.
While this form of inversion may be driven by business considerations, tax considerations may
also be part of the decision. An example of this can be seen in the following statement by the
board of directors of a U.S. corporation recommending approval of a merger with a U.K.
corporation. The board of directors pursued the merger in part because
Ensco was headquartered in a jurisdiction that has a favorable tax regime and an extensive
network of tax treaties, which can allow the combined company to achieve a global
effective tax rate comparable to Pride’s competitors.32
In this case, a U.S. firm, Pride, merged with a U.K. firm, Ensco, and the headquarters remained in
the U.K.
A Smaller Foreign Corporation Acquired by a U.S. Corporation
In this form of inversion, a U.S. corporation would like to bolster its foreign operations and lower
its U.S. tax. To do so, the U.S. corporation merges with a smal er foreign corporation, with the
U.S. shareholders owning a majority share of the new merged company. This merger results in the
effective control of the new company staying with the shareholders of the U.S. corporations.
While this form of inversion may be driven by business considerations, tax considerations may
also be part of the decision. An example is the Eaton Cooper merger. The following is an excerpt
of a U.S. corporation’s (Eaton’s) press release announcing the acquisition of an Irish company
(Cooper), with the company headquartering in Ireland (with a 12.5% tax rate and a territorial
system).
At the close of the transaction ... Eaton and Cooper will be combined under a new company
incorporated in Ireland, where Cooper is incorporated today. The newly created company,
which is expected to be called Eaton Global Corporation Plc or a variant thereof (“New
Eaton”), will be led by Alexander M. Cutler, Eaton’s current chairman and chief executive
officer.33
At the close of the merger, it was expected that the shareholders of the U.S. company would
control 73% of the combined company, with the shareholders of the Irish company controlling the
remaining 27%. The press release notes expected tax benefits from the merger at $165 mil ion in
2016, out of $535 mil ion of total cost savings.
In this case, a U.S. corporation used a merger to achieve an inversion while its shareholders
retained a significant majority of shares.

32 Ensco-Pride International Inc. Joint Proxy Statement, “Recommendation of the Pride Board of Directors and Its
Reasons for the Merger,” April 25, 2011, http://www.sec.gov/Archives/edgar/data/314808/000095012311039244/
d80026b3e424b3.htm.
33 Eaton Corporation, “Eaton to Acquire Cooper Industries to Form Premier Global Power,” press release, May 21,
2012, http://www.eaton.com/ecm/groups/public/@pub/@eaton/@corp/documents/content/pct_361385.pdf.
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Response to Initial Inversions: The American Jobs
Creation Act
In the late 1990s and early 2000s, news reports drew the attention of policymakers and the public
to a phenomenon sometimes cal ed corporate “inversions” or “expatriations”: instances where
firms that consist of multiple corporations reorganize their structure so that the “parent” element
of the group is a foreign corporation rather than a corporation chartered in the United States.
Among the more high-profile inversions were Ingersoll-Rand, Tyco, the PXRE Group, Foster
Wheeler, Nabors Industries, and Coopers Industries.34
These corporate inversions apparently involved few, if any, shifts in actual economic activity
from the United States abroad, at least in the near term. In particular, inverted firms typical y
continued to maintain headquarters in the United States and did not systematical y shift capital or
employment abroad post inversion.35 Further, Bermuda and the Cayman Islands were the location
of many of the newly created parent corporations—jurisdictions that have no corporate income
tax but that also do have highly developed legal, institutional, and communications
infrastructures.
A 2002 study by the U.S. Treasury Department concluded that while inversions were not new —
the statutory framework making them possible has long been in existence—there had been a
“marked increase” in their frequency, size, and visibility.36
Taken together, these facts suggested that tax savings were one goal of the inversion, if not the
primary goal. Beyond taxes, firms engaged in the inversions cited a number of reasons for
undertaking them, including creating greater “operational flexibility,” improved cash
management, and an enhanced ability to access international capital markets.37
The 2002 Treasury report identified three main concerns about corporate inversions: erosion of
the U.S. tax base, a cost advantage for foreign-controlled firms, and a reduction in perceived
fairness of the tax system.38 These concerns, along with a growing awareness of inversion
transactions, may have resulted in congressional concern and debate about how to address the
issues surrounding inversions, culminating with the enactment of an anti-inversion provision
(Section 7874) in the American Jobs Creation Act of 2004 (AJCA; P.L. 108-357).
The AJCA adopted two alternative tax regimes applicable to inversions occurring after March 4,
2003. The AJCA treats the inverted foreign parent company as a domestic corporation if it is
owned by at least 80% of the former parent’s stockholders. In these cases, the AJCA would deny

34 “While Companies Shift Addresses to T ax Havens, CEO’s Stay Put,” Bloomberg Visual Data, May 4, 2014,
http://www.bloomberg.com/infographics/2014-05-04/companies-shift-addresses-abroad.html.
35 U.S. Government Accountability Office, Cayman Islands: Business and Tax Advantages Attract U.S. Persons and
Enforcem ent Challenges Exist, GAO-88-778, July 24, 2008.
36 U.S. Department of the T reasury, Office of T ax Policy, Corporate Inversion Transactions: Tax Policy Implications
(Washington: May, 2002), p. 1.
37 T hese reasons are cited by Stanley Works in an SEC registration statement dated June 21, 2002. T he statement is
available on the SEC website at http://www.sec.gov/Archives/edgar/data/93556/000095013002004501/0000950130-
02-004501.txt. See also the November 2, 2001, proxy statement by Ingersoll-Rand (IR), which cites “ a variety of
potential business, financial and st rategic benefits.” T he statement is available on the IR website at
http://www.shareholder.com/ir/edgar.cfm?Page=2.
38 U.S. Department of the T reasury, Office of T ax Policy, Corporate Inversion Transactions: Tax Policy Implications,
May 2002, p. 21.
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the firm any tax benefits of the inversion (i.e., it would continue to be taxed on the combined
group’s worldwide income). The second regime applies when there is at least 60% continuity of
ownership but less than 80%. In this case, the new foreign parent is not taxed like a domestic
corporation, but any U.S. toll taxes (taxes on gains) that apply to transfers of assets to the new
entity are not permitted to be offset by foreign tax credits or net operating losses. The AJCA also
exempted corporations with substantial economic activity in the foreign country from the anti-
inversion provisions, but it did not define substantial business activity in the statute.39
Post-2004 Inversions and Treasury Regulations
of 2012
Although the 2004 act largely eliminated the generic naked inversions, two alternatives remained
that al owed a firm to shift headquarters and retain control of the business: the naked inversion
via the business activity exemption, and merger with a smal er company.40 Using the business
activity route would require significant economic operations in the target country. An inversion
by merger would require a large firm that would be at least 25% of the size of the U.S. firm.
The post-2004 approaches to inversions no longer involved countries such as Bermuda and the
Cayman Islands, but larger countries with substantial economic activity such as the U.K., Canada,
and Ireland. The U.K., in particular, has become a much more attractive headquarters. Because of
freedom of movement rules in the European Union, the U.K. cannot have anti-inversion laws,
which may have played a role in both moving to a territorial tax and lowering the corporate tax
rate.
A 2012 report in the Wall Street Journal highlighted some recent moves abroad.41 This report
claimed 10 companies had inverted since 2009, with 6 within the past year or so. This was a smal
number of companies, but it is useful to look at the methods involved. The Wall Street Journal
article identified by name 5 of the 10 companies that had moved abroad recently: Aon, ENSCO,
Rowan, Eaton, and DE Master Blenders 1763. (The article also referred to Transocean and
Weatherford International, but these were firms that had inverted before the 2004 legislation:
Transocean first to the Cayman Islands, and then Switzerland, and Weatherford first to Bermuda,
and then Switzerland.) The remaining firm mentioned in the Wall Street Journal article is Eaton.
Eaton’s move abroad was a merger; it merged with Coopers, a firm effectively operating its
headquarters in the United States, but one that had inverted prior to the 2004 law change.
An article by Bret Wel s identified Aon, ENSCO, and Rowan as having inverted via the
substantial business activity exemption (where the only apparent objective is tax savings).42 Al
three moved to the United Kingdom, where a recent move to a territorial tax, as wel as decisions
in the European Court of Justice that limited their anti-abuse rules, had made their tax system
more attractive.43 The U.K. was also in the process of lowering its own corporate rate. Two of the

39 T reasury initially defined substantial business activity as being 10% of worldwide activity in regulation and in 2012
revised the regulation to redefine substantial business activity as being 25% of worldwide activity.
40 T he third form of inversion, merger with a larger foreign corporation, would result in control moving outside the
United States.
41 John D. McKinnon and Scott T hurm, “U.S. Firms Move Abroad to Cut T axes: Despite ’04 Law, Companie s
Incorporate Overseas, Saving Big Sums on T axes,” Wall Street Journal, August 28, 2012.
42 Bret Wells, “Cant and the Inconvenient T ruth about Corporate Inversions.” Tax Notes, July 23. 2012, pp. 429-439.
43 Cadbury-Schweppes, September 12, 2006. T he U.K. rule required that income subject to a tax rate much lower than
the U.K. rates be taxed; this rule was not accepted by the court. See Cleary Gottlieb, “ Cadbury Schweppes: UK CFC
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firms are oil dril ing firms; dril ing in the North Sea might have affected their ability to use this
exemption. Aon is an insurance firm.
Wel s mentions another firm, Tim Hortons, which also used a naked inversion using the
substantial business activity exemption in 2009 to relocate to Canada. In doing so, the firm was
returning to its origins, as it was founded in Canada. It became an American company when
Wendy’s acquired it in 1995, but it was subsequently spun off in 2006.44 DE Master Blenders
1763, like Tim Hortons, was returning to its origins as wel (a Netherlands firm), as it was spun
off from Sara Lee, which had acquired it in 1978.45
In response to increased use of the substantial business activity exemption, Treasury Regulations
(T.D. 9592, June 12, 2012) increased the safe harbor for the substantial business activities test
from 10% to 25%, effectively closing off this avenue in the future.46 This action could be done by
regulation because the statute did not specify how the substantial business activity test was to be
implemented.
A number of mergers have either been effectuated or were proposed: Chiquita, Actavis, and
Perrigo (the latter two are pharmaceutical firms) moving to Ireland; Valeant Pharmaceuticals and
Endo Health Services moving to Canada; and Liberty Global (a cable company) to the U.K.
Subsequently, the new Irish firm Actavis (itself the result of two prior mergers) merged with
Forest Labs.47 Omnicom (an advertising firm) planned a move to the U.K. (after proposed merger
with a French firm, creating a Netherlands holding company, resident in the U.K. for tax
purposes), but has abandoned its merger.48 Chiquita canceled its plans after Treasury regulations
were issued in September 2014.49
Most of these firms are not household names or industry giants. Thus, perhaps none created as
much interest as the attempt by pharmacy giant Pfizer to acquire AstraZeneca with a U.K.
headquarters, or the urging of some stockholders of Walgreens to invert to Switzerland. Pfizer
represented a significant potential loss of future tax revenue, as much as $1.4 bil ion per year.50

Rules T oo Restrictive,” http://www.cgsh.com/files/News/9e29ed20-66c5-4558-93eb-dc8ab51c54c9/Presentation/
NewsAttachment/2fcdb202-5144-4e40-8498-dd0d04f99926/cadbury-schweppes.pdf.
44 T im Hortons, “The Story of T im Hortons.”
45 DE Master Blenders 1753, “Our Heritage,” 2012 (visited), http://www.demasterblenders1753.com/en/Company/Our-
heritage/.
46 Bret Wells, “Cant and the Inconvenient T ruth about Corporate Inversions.” Tax Notes, July 23. 2012, pp. 429-439;
Kristen A. Parillo, “Government Defends Business Activities T est in New Regs.” Tax Notes, July 23, 2012, pp. 370-
371.
47 For news reports, see Zachary R. Mider “Companies Flee U.S. T ax System by Reincorporating Abroad,” Bloomberg,
January 27, 2014, http://www.bloomberg.com/infographics/2014-01-27/companies-flee-u-s-tax-system-by-
reincorporating-abroad.html and “ Companies Fleeing T axes Pay CEOs Extra as Law Backfires,” Bloom berg, January
27, 2014, http://www.bloomberg.com/news/2014-01-27/companies-fleeing-taxes-pay-ceos-extra-as-law-backfires.html.
“Actavis, Forest Labs In Biggest Merger In Specialty Pharma,” May 5, 2014, Investor’s Business Daily
http://finance.yahoo.com/news/actavis-forest-labs-biggest-merger-
223800951.html;_ylt=A0LEV1G3kWdT 7jEAEGFXNyoA;_ylu=X3oDMT EyaGV0M2l0BHNlYwNzcgRwb3MDMw
Rjb2xvA2JmMQR2dGlkA1FJMDQ5XzE-.
48 T om Fairless, “Publicis, Omnicom Merger T angled in T ax Red-T ape,” Wall Street Journal, April 25, 2014,
http://www.marketwatch.com/story/publicis-omnicom-merger-tangled-in-tax-red-tape-2014-04-25 and David Gelles,
“At Odds, Omnicom and Publicis End Merger,” May 8, 2014, New York Times, http://dealbook.nytimes.com/2014/05/
08/ad-agency-giants-said-to-call-off-35-billion-merger/.
49 See Kevin Drawbaugh, Factbox: “Another U.S. T ax ‘Inversion’ Implodes, Pending Deals Dwindle,” Reuters,
October 24, 2014, http://www.reuters.com/article/2014/10/24/us-usa-tax-pending-inversions-
idUSKCN0ID1VR20141024.
50 Zachary R. Mider, “T ax Break ‘Blarney’: U.S. Companies Beat the System With I rish Addresses,” Bloomberg, May
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According to a study by Martin Sullivan, in 2005, when a temporary tax exclusion of 85% of
dividends (the repatriation holiday) was in force, Pfizer repatriated $37 bil ion, the single largest
amount of repatriations of any firm.51 In 2009, Pfizer repatriated $34 bil ion (and paid U.S. taxes
on that amount) to finance the acquisition of Wyeth, but earnings abroad grew from $42 bil ion in
2009 (after the repatriation) to $73 bil ion by 2012. These earnings have not been repatriated and
taxed in the United States.52 An inversion by Pfizer would, however, result in current shareholders
paying capital gains taxes on any stock appreciation when they are converted into shares of the
new company. Shares held in IRAs and 401(k)s would not typical y owe this tax, but shares
owned directly by individuals and in mutual funds would owe tax even if they did not sel their
stock.53
Policymakers and the public remained interested in the issue of inversions through 2014.
Although the initial Pfizer merger did not occur, the spate of mergers or proposed mergers in the
medical device and pharmaceuticals industries continued in 2014. One example included one of
the largest proposed mergers yet, AbbVie’s acquisition of Shire, an Irish firm. The announcement
of a proposed merger between Burger King and Tim Hortons also generated interest in the issue.54
As is the case with Chiquita, AbbVie canceled its plans after the issuance of Treasury regulations
in September 2014, but Burger King planned to complete its merger and did so on December 12,
2014.55
Treasury continues to regulate inversions where regulations are possible. For example, in 2014 it
took action to close a loophole stemming from the coordination of two sets of regulations—the
“Anti-Kil er B Regulations” and the “Helen of Troy Anti-Inversion Regulations”—that al owed
Liberty Global shareholders to avoid some capital gains taxes.56

5, 2014, http://www.bloomberg.com/news/2014-05-04/u-s-firms-with-irish-addresses-criticized-for-the-moves.html.
51 Martin A. Sullivan, “Economic Analysis: Pfizer’s T ax Picture Dominated by U.S. Losses, Repatriation,” Tax Notes,
July 8, 2013, http://www.taxanalysts.com/www/features.nsf/Articles/8A8A34FCBD7C3C3F85257BA200497696?
OpenDocument .
52 For a news article on the proposed Pfizer merger see Kevin Drawbaugh, “Pfizer Move to Join T ax-Driven Deal-
Making Raises Red Flags in U.S,” Reuters, April 14, 2014, http://www.reuters.com/article/2014/04/28/us-usa-tax-
pfizer-analysis-idUSBREA3R1FL20140428. For an article on Walgreens, see Ameet Sachdev and Peter Frost,
“Walgreen Pressured to Move Headquarters to Europe,” Chicago Tribune, April 14, 2014,
http://articles.chicagotribune.com/2014-04-14/business/chi-walgreens-headquarters-to-europe-20140414_1_walgreen-
co-tax-rate-tax-deals.
53 Laura Saunders and Jonathan D, Rockoff, “Pfizer Holders Could Face T ax Hit in a Deal for AstraZeneca ,” Wall
Street Journal, May 8, 2014.
54 Nathan Vardi, “AbbVie T o Buy Shire For $54 Billion In Biggest Inversion Deal Ever,” Forbes, July 18, 2014,
http://www.forbes.com/sites/nathanvardi/2014/07/18/abbvie-to-buy-shire-for-54-billion-in-biggest-inversion-deal-ever/
; Liz Hoffman and Dana Mattioli, “ Burger King in T alks to Buy T im Hortons in Canada T ax Deal: T ie -Up Would Be
Structured as T ax Inversion With a Combined Market Value of About $18 Billion,” Wall Street Journal, August 25,
2014, http://online.wsj.com/articles/burger-king-in-talks-to-buy-tim-hortons-1408924294.
55 See Kevin Drawbaugh, Factbox: “Another U.S. T ax ‘Inversion’ Implodes, Pending Deals Dwindle,” Reuters,
October 24, 2014, http://www.reuters.com/article/2014/10/24/us-usa-tax-pending-inversions-
idUSKCN0ID1VR20141024 and Nasdaq, “ Long-awaited Burger King-T im Hortons Merger Completed - Analyst
Blog,” December 15, 2014, at http://www.nasdaq.com/article/long-awaited-burger-king-tim-hortons-merger-
completed-analyst -blog-cm423414.
56 IRS Notice 2014-14. See “IRS Aims at Innovative M&A Inversion Structure,” Sidley Austin LLP, at
http://m.sidley.com/04-29-2014-Tax-Update/.
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Treasury Notice 2014-52, September 22, 2014
In response to the new wave of inversions, the Treasury Department released a notice of
regulatory actions that would restrict inversions and their benefits.57 Treasury news releases,
however, indicated that legislative action is the only way to fully rein in these transactions.58
Following this notice, several firms announced they were canceling plans to merge, and one firm,
Medtronic, announced a change in financing plans (no longer using earnings abroad to pay
acquisition costs). Other firms, however, have announced inversion plans.59 There is no way to
know how many unannounced mergers were, or wil be, prevented by these regulations.
The regulatory actions address two basic aspects of inversions. One set of changes limits the
ability to access the accumulated deferred earnings of foreign subsidiaries of U.S. firms. The
second regulatory action restricts certain techniques used in inversion transactions that al owed
firms to qualify with less than 80% ownership. This regulation is effective for inversions that
closed on or after September 22, 2014. The regulations do not prevent inversions via merger and
do not address earnings stripping by shifting debt to the U.S. firm, although Treasury has
indicated future action in this area.60
Limiting the Access to Earnings of U.S. Foreign Subsidiaries
In an inversion, the foreign subsidiaries of the original U.S. firm remain subsidiaries so that any
dividends paid to the U.S. parent would be taxed.61 Regulations also treat other direct investments
in U.S. property, such as loans to the U.S. parent, as dividends.62 Once a firm has inverted and the
U.S. firm is now a subsidiary of a foreign parent, there are methods of accessing the earnings of
overseas subsidiaries by transactions between the new foreign parent and the U.S. firm’s foreign
subsidiaries. The regulation is intended to address three such methods.
First, the regulation prevents the access to funds by, for example, a loan from the U.S. company’s
foreign subsidiary to the new foreign parent (cal ed “hopscotching”). Before the regulation, funds
of this type could have been used to pay dividends to the individual shareholders or for other
purposes. Under the regulation, acquiring any obligation (such as a loan) or stock of a foreign
related person is treated as U.S. property subject to tax.
Second, the regulation addresses “decontrolling,” where the foreign acquiring corporation issues
a note or transfer of property for stock in the U.S. firm’s foreign subsidiaries. If a majority of
stock is obtained, the U.S. firm’s subsidiary is no longer a controlled foreign corporation (CFC)
and not subject to Subpart F, which taxes currently certain passive or easily shifted income.

57 T reasury, “ Fact Sheet: T reasury Actions to Rein in Corporate T ax Inversions,” press release, at
http://www.treasury.gov/press-center/press-releases/Pages/jl2645.aspx.
58 See T reasury press release, “T reasury Announces First Steps to Reduce T ax Benefits of Corporate Inversions,” at
http://www.treasury.gov/press-center/press-releases/Pages/jl2647.aspx.
59 See Kevin Drawbaugh, “Factbox: Another U.S. T ax ‘Inversion’ Implodes, Pending Deals Dwindle,” Reuters,
October 24, 2014, October 13, 178-179.
60 See Andrew Velarde “Next Inversion Guidance May Affect Interest Deductions and Debt,” Tax Notes, November 3,
2014, pp. 490-491.
61 T ransfers of the stock or assets of these foreign subsidiaries to other parts of the new related group would incur a
corporate level transfer tax that is generally prohibitive.
62 U.S. property includes tangible property in the United States, stock of a domestic corporation, and obligations of a
U.S. person. It also includes the right to use patents; copyrights; inventions, models or designs; secret formulas or
processes; or any other similar right in the United States. U.S. property is defined in Section 956(c)(1) of the Internal
Revenue Code.
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However, even a less than majority share can al ow partial access to deferred earnings without a
U.S. tax. This regulation prevents this by treating acquisition of foreign subsidiary stock as
acquisition of stock in the U.S. parent.
Third, the regulation addresses transactions where the foreign acquiring corporation sel s stock of
the former U.S. parent corporation to that U.S. parent corporation’s CFC in exchange for property
or cash. If such a transaction is structured properly, some interpretations of the old regulations
would have permitted the income to avoid taxation. The new regulations would prevent that and
would apply regardless of the firm’s inversion status.
Addressing Techniques to Achieve Less Than 80%
Ownership Requirement
A firm can realize the tax benefits of an inversion only if the shareholders of the original U.S.
firm retain, after the merger, less than 80% of the ownership in the new company. The regulation
contains several provisions that limit certain techniques for achieving this goal. The avoidance
techniques include inflating the foreign firm, shrinking the U.S. firm, and inverting only part of
the U.S. firm.
First, it prevents firms from reaching the less than 80% goal by inflating the size of the foreign
merger partner (which must have more than 20% ownership subsequent to the merger) by use of
passive assets (e.g., an interest bearing bank deposit). This notice disregards passive assets of the
foreign firm if more than 50% of its value is in passive assets. (Banks and financial service
companies are excluded.)
Second, it prevents firms from shrinking the size of the U.S. firm by paying extraordinary
dividends before the merger. The notice disregards this reduction in value.
Third, it prevents an inversion of part of a U.S. company (a “spinversion”) by spinning it off to a
newly formed foreign corporation, by treating the new “foreign” company as a domestic
corporation.
Inversions After Treasury Notice 2014-52 and the
2015 Treasury Regulations
After the 2014 Treasury regulations were issued, some firms revised their plans, and the pace of
inversions slowed. Some mergers were structured to avoid the anti-inversion rules and Treasury
regulations, by an ownership share of less than 60%. Among what appear to be inversions is the
merger of telecom firm Arris and Pace (a U.K. firm), CF Industries (fertilizer) and OCI NB (a
Netherlands firm), Terex with Konecranes (a Finnish firm), and a consolidation of European
Coca-Cola bottling firms (one such firm, Coca-Cola Enterprises, was a U.S. headquartered
firm).63 Waste Connections Inc. merged with Progressive Waste Solutions Ltd (a Canadian Firm),
with 70% ownership and a headquarters in Canada.64 Monsanto’s proposal to merge with
Syngenta (a Swiss firm) was cal ed off.

63 For a discussion of some of these mergers, see Arash Massoudi and Nathalie T homas, “Cranes Deal Lifts T ally of
T ax Inversions,” AFRWeekend, August 12, 2015, http://www.afr.com/news/world/cranes-deal-lifts-tally-of-tax-
inversions-20150811-gix34y.
64 Anne Steel, “Waste Connections, Progressive Waste Strike $2.7 Billion Inversion Deal,” Wall Street Journal,
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Some mergers that did not qualify as inversions under the tax law also occurred. The most
significant in size was the proposed Pfizer merger. On November 23, 2015, Pfizer announced a
proposed merger with Al ergan, an Irish company, and the move of its headquarters to Ireland.
This merger, which would result in the largest pharmaceutical company in the world, is not
covered under the anti-inversion rules because Pfizer wil own 56% of the value of the new
firm.65 Al ergan itself is the product of a merger involving both stock and cash acquisition by
Actavis in 2015, with former Al ergen shareholders owning a minority of the new company. Thus,
this merger as wel was not an inversion under the tax law. Actavis, in turn, was a former U.S.
firm that inverted by merger with Warner Chil cott, an Irish firm, in 2013 (where the former
shareholders of the U.S. firm acquired 77% of the stock).66 Pfizer terminated its merger with
Al ergen after the April 4, 2016, regulations (discussed below). Other notable mergers not subject
to anti-inversion rules were the acquisition of Salix, a pharmaceutical company, by Valeant (a
Canadian company); the acquisition of Auxilium by Endo (after Auxilium backed out of an
inversion with Canadian firm QLT); the merger of Cyberonics with Italy’s Sorin (to be
headquartered in the U.K.); and the merger of Broadcom (a chipmaker) with Avago (a Singapore
firm).67 Information and analytics provider HIS announced a merger with Markit Ltd, a U.K.
firm, to be headquartered in the U.K., but the ownership share of HIS would be less than 60% of
the firm.68 Johnson Controls also merged with Tyco, one of the earlier inverted firms.69
The 2015 Treasury regulations appear to have more limited consequences for inversions than the
2014 regulations did. Three regulatory changes were made by the notice.70 First, in the case where
the foreign parent is a tax resident of a third country, stock issued by that parent to the existing
foreign firm wil be disregarded for purposes of the ownership requirement. That change wil
prevent a U.S. firm from merging with a partner and then choosing a tax friendly third country to
headquarter in. The second provision would clarify the so cal ed “anti-stuffing” rules, where the
foreign firm’s size is inflated by adding assets to that firm. The notice clarifies that this rule
applies to any assets, not just passive assets. Third, the current business activity exception
requires 25% of business activity to be in the foreign country where the new parent is created or
organized, but does not require it to be a foreign parent. This rule requires the business activity to
be in the foreign parent. It prevents inversion based on the business activity test when the foreign
parent has a tax residence in another country without substantial business activities.

January 19, 2016, https://www.wsj.com/articles/waste-connections-progressive-waste-strike-inversion-deal-
1453211211.
65 See Jackie Wattles and Heather Long, “Avoiding U.S. Corporate T axes,” CNN Money, November 23, 2013,
http://money.cnn.com/2015/11/23/investing/pfizer-allergan-merger/ and Kevin McCoy, “ Experts: U.S. Unlikely to
Block Pfizer-Allergan Deal, USA Today, November 23, 2015, http://www.usatoday.com/story/money/2015/11/23/
experts-treasury-unlikely-block-pfizer-allergan-deal/76268708/.
66 Actavis to Acquire Warner Chilcott to Create Premier $11 Billion Revenue Global Specialty Pharmaceutical
Company, http://ir.actavis.com/phoenix.zhtml?c=65778&p=irol-newsarticle&ID=1821961.
67 Several of these mergers are discussed in Amanda Athanasiou, “Is the Anti-Inversion Notice Doing its Job?” Tax
Notes, March 9, 2015, pp. 1185-1186.
68 Anne Steele and Shayndi Raice, “HIS and Market to Merge in an Inversion Deal, Creating Data Heavyweight, March
21, 2016, Wall Street Journal, https://www.marketwatch.com/story/ihs-and-markit-to-merge-in-an-inversion-deal-
creating-data-heavyweight -2016-03-21.
69 Nasdaq, “Johnson Controls to Proceed With Tyco Merger Plan,” April 21, 2016, http://www.nasdaq.com/article/
johnson-controls-to-proceed-with-tyco-merger-plan-20160421-00578.
70 T reasury Notice 2015-79. See T reasury’s press release at https://www.treasury.gov/press-center/press-releases/Pages/
jl0282.aspx.
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Treasury Regulations, April 4, 2016
On April 4, 2016, the Treasury Department issued temporary and proposed regulations
formalizing rules contained in Notices 2014-52 and 2015-79 limiting corporate tax inversions, as
wel as adding new rules addressing inversions and earnings-stripping transactions.71 In response
to these new regulations, the proposed merger between Pfizer and Al ergen PLC has been
terminated.72
Anti-Inversion Regulations
The April 4, 2016, Treasury regulations put in place several anti-inversion rules that target groups
that have engaged in a series of inversion or acquisition transactions as wel as a rule that restricts
postinversion asset dilution.
Multiple Domestic Entity Acquisition Rule
The temporary regulations target inversion transactions involving a new foreign parent that
previously acquired one or more U.S. entities in inversions or acquisitions in which the new
foreign parent issued stock. These prior acquisitions would general y increase the value of the
foreign entity, enabling it to subsequently engage in an inversion transaction with a larger U.S.
company while remaining below the 60% or 80% ownership thresholds. The temporary
regulations disregard stock of the new foreign parent to the extent the value of such stock is
attributable to its prior U.S. entity acquisitions during the prior three years. According to analysis
by Americans for Tax Fairness, the implementation of this rule would have increased Pfizer’s
share of the merged company to roughly 70% from 56% prior to the rule.73
Multiple-Step Acquisition Rule
Similar to the multiple domestic entity acquisition rule, the multiple-step acquisition rule targets
certain inversions that are structured as back-to-back foreign acquisitions. Specifical y, it targets
transactions that are part of a plan in which a foreign corporation acquires substantial y al of the
assets of a U.S. entity and, subsequent to this first acquisition, a second foreign corporation
acquires substantial y al of the assets of the first foreign corporation. The temporary regulations,
under certain circumstances, treat each acquisition as an acquisition of a U.S. entity that may be
subject to anti-inversion rules. Unlike the multiple domestic entity acquisition rule, which has a
three-year look-back period, the multiple-step acquisition rule can be applied to al acquisitions
that are part of the same plan regardless of time.
Asset Dilution Rule
A third rule modified existing regulations to restrict the ability of inverted companies to avoid
paying tax on unrealized gains (under Section 965) through a transfer to a controlled foreign
corporation (CFC) (under Section 351). This would address situations where a CFC of an
inverted U.S. company engages in a postinversion exchange that could dilute a U.S. shareholder’s
indirect interest in the exchanged asset, al owing the U.S. shareholder to avoid U.S. tax on any

71 U.S. Department of the T reasury, Fact Sheet: Treasury Issues Inversion Regulations and Proposed Earnings
Stripping Regulations, April 4, 2016, https://www.treasury.gov/press-center/press-releases/Pages/jl0404.aspx.
72 Andrew Velarde, “T reasury Finally KOs Pfizer Inversion,” Tax Notes, April 11, 2013.
73 Frank Clemente, New Treasury Dept. Anti-Inversion Rule Would Prevent Pfizer’s Estimated $35 Billion Tax Break,
Americans for T ax Fairness, April 5, 2016.
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realized gain in the asset that is not recognized at the time of the transfer. The rule requires a CFC
of an inverted U.S. group to recognize al realized gain with respect to any such postinversion
Section 351 exchange.
Earnings-Stripping Regulations
The earnings-stripping regulations aim to restrict the ability of foreign-parent groups to shift
earnings out of the United States through dividends or other economical y similar transactions
(under Section 385).74 In these cases certain related-party debt wil be characterized as equity for
tax purposes. The result of equity classification is that interest deductions wil be disal owed, and
withholding obligations of 30% (or lower rate based on an applicable income tax treaty) could
ensue. The regulations do not normal y apply for related-party debt that is incurred to fund actual
business investment, such as building or equipping a factory.
The regulations also require documentation of debt instruments issued and held by certain
members of an expanded group to establish that such instruments are properly characterized as
debt. The regulations also al ow the IRS on audit to treat an instrument issued to a related party as
in part debt and in part equity.
The final regulations issued on October 21, 2016,75 scaled back the original regulations in
response to the comment period. The final regulations removed the general bifurcation rule that
would have al owed a debt instrument to be classified as part debt and part equity and an
exemption for debt for foreign issuers. The rules also provided exemptions for cash pools (a pool
of cash to be accessed for short-term needs), short-term loans, regulated financial entities, and
pass-throughs (firms not taxed as corporations). The Treasury delayed documentation rules for a
year on July 28, 2017.76 Treasury announced on July 7, 2017, that these debt-equity regulations
were to be among eight rules targeted for review.77
The Treasury issued final regulations for the temporary regulations introduced in April 2016 on
July 12, 2018, as TD 9834, with minor changes.78 Final regulations for the earnings stripping
rules were issued on May 14, 2020, following the expiration of temporary regulations on October
13, 2019.79

74 T he regulations apply broadly to any related firms including all U.S. subsidiaries of foreign parents, any other cross
border firms including U.S. multinationals and their subsidiaries, and domestic corporations, although inverted firms
are noted as a concern in the April 4, 2016 T reasury press release and the Section 385 regulations were issued jointly
with other regulations affecting inversions.
75 T reasury Decision 9790, https://www.irs.gov/irb/2016-45_IRB/ar09.html.
76 Notice 2017-36, https://www.irs.gov/pub/irs-drop/n-17-36.pdf.
77 Notice 2017-38, https://www.irs.gov/pub/irs-drop/n-17-38.pdf.
78 T reasury Decision 9834, at https://www.federalregister.gov/documents/2018/07/12/2018-14693/inversions-and-
related-transactions.
79 See Internal Revenue Service, “T he T reatment of Certain Interests in Corporations as Stock or Indebtedness,” 85
Federal Register 28867, May 14, 2020, at https://www.federalregister.gov/documents/2020/05/14/2020 -08096/the-
treatment-of-certain-interests-in-corporations-as-stock-or-indebtedness.
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Inversions After the April 4, 2016, Treasury
Regulations
Two days after the regulations were issued, Pfizer withdrew from its merger with Al ergen, an
Irish-based company that was an inverted firm. It appears that this merger was affected by the
multiple-entity rule, which has come to be cal ed “serial inversion.”80 Mergers between Shire
(Ireland based) and Basalta, and between HIS and Markit Group Inc. (U.K. based) went
forward.81 The CF Industries merger with OCI NV (based in the Netherlands) was also cal ed off;
Johnson Controls and Tyco went forward.82 A merger between Konecranes (a Finnish firm) and
Terex was scaled down to an acquisition of a share of Terex with the U.S. firm owning 25%, thus
avoiding the effect of regulations.83
In May 2016 Cardtronics, Inc., an ATM operator, announced a plan to move to the U.K. using the
substantial business activities test.84 Also in May, an oil and gas industry service and technology
firm announced a merger with Technip SA (France) to form a U.K. company, with each firm
holding about half the stock and thus avoiding any of the recent regulations and establishing a
new headquarters in another country.85 In 2017, Praxaire (a U.S. industrial gas company)
announced a merger with Linde AG (a German gas and technology company), also with each
owning half of the new company.86
As noted in the introduction, statistical data suggest a decline in inversions from 2015 to 2016,
and again from 2016 to 2017, and these data are consistent with the limited news reports of major
inversions.87 Pfizer’s CEO has recently indicated that deals are on hold general y while tax reform
is being considered.88
P.L. 115-97, the 2017 Act
The 2017 legislation not only made fundamental changes to the overal treatment of corporate
income at home and abroad, but also adopted several provisions specifical y aimed at inverted
corporations (those with 60% to 80% ownership).

80 New T reasury Dept. Anti-Inversion Rule Would Prevent Pfizer’s Estimated $35 Billion T ax Break , Americans for
T ax Fairness, April 5, 2016, https://americansfortaxfairness.org/new-treasury-dept-anti-inversion-rule-would-prevent -
pfizers-estimated-35-billion-tax-break/.
81 Andrew Velarde, “T reasury Finally KOs Pfizer Inversion,” Tax Notes Today, April 7, 2016.
82 Andrew Velarde, “ Year in Review: Immense Change, Contentious T alk in Debt -Equity Classification,” Tax Notes,
January 2, 2017, pp. 15-17.
83 Andrew Velarde, “ T erex-Konecranes Merger Downsized After Lost T ax Benefits,” Tax Notes, May 23, 2016, pp.
1032-1033.
84 Amanda Athanasiou, “ AT M Operator Cardtronics Seeks Friendlier T ax Regime in U.K.,” Tax Notes Today, April 29,
2016.
85 Amanda Athanasiou, U.S. “Company FMC T echnologies to Merge With France’s T echnip,” Tax Notes, May 30,
2016, pp. 1181-1182.
86 Amanda Althanasiou, “ Praxair to Merge With Germany’s Linde,” Tax Notes, January 2, 2017, pp. 62-63.
87 For a list of major inverted corporations see Bloomberg, T racking T ax Runaways, Updated March 1, 2017,
https://www.bloomberg.com/graphics/tax-inversion-tracker/. T his list does not address the exact circumstances or
owrnership share of each firm.
88 Stephanie Cumings, Pfizer CEO Says Big Deals Delayed by T ax Reform, Tax Notes, August 7, 2017, pp. 685-686.
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Recapture of Deemed Repatriation Rate Reduction
Under the new law, existing untaxed earnings held abroad are taxed under a deemed repatriation
rule, but at a lower rate (8% for earnings reinvested in noncash assets and 15.5% for earnings
held as cash or cash equivalents). A special recapture rule applies on deemed repatriations of
newly inverted firms. This recapture rule applies if a firm first becomes an expatriated entity at
any time during the 10-year period beginning on December 22, 2017. In this case, the tax wil be
increased from 8% and 15.5% to 35% tax for the entire deemed repatriation, with no foreign tax
credit al owed for the increase in tax rate. The additional tax is due on the full amount of the
deemed repatriation in the first tax year in which the taxpayer becomes an expatriated entity.
Inclusion of Cost of Goods Sold in BEAT
BEAT excludes payments which reduce gross receipts with the result that payment for the cost of
goods sold is not included under BEAT. An exception applies for firms that invert after November
9, 2017, where payments to a foreign parent or any foreign firm in the affiliated for cost of goods
sold is included in BEAT.
Modification of Attribution Rules
The constructive ownership rules for purposes of determining 10% U.S. shareholders, whether a
corporation is a CFC and whether parties satisfy certain relatedness tests, were expanded in the
2017 tax revision. Specifical y, the new law treats stock owned by a foreign person as attributable
to a U.S. entity owned by the foreign person (so-cal ed “downward attribution”). As a result,
stock owned by a foreign person may general y be attributed to (1) a U.S. corporation, 10% of the
value of the stock of which is owned, directly or indirectly, by the foreign person; (2) a U.S.
partnership in which the foreign person is a partner; and (3) certain U.S. trusts if the foreign
person is a beneficiary or, in certain circumstances, a grantor or a substantial owner.
The downward attribution rule was original y conceived to deal with inversions. In an inversion,
without downward attribution, a subsidiary of the original U.S. parent could lose CFC status if it
sold enough stock to the new foreign parent so the U.S. parent no longer had majority ownership.
With downward attribution, the ownership of stock by the new foreign parent in the CFC is
attributed to the U.S. parent, so that the subsidiary continues its CFC status, making it subject to
any tax rules that apply to CFCs (such as Subpart F and repatriation taxes under the old law, and
Subpart F and GILTI under the new law).
Other Provisions Affecting Stockholders and Stock Compensation
Dividends (like capital gains) are al owed lower tax rates than the rates applied to ordinary
income. The rates are 0%, 15%, and 20% depending on the rate bracket that ordinary income fal s
into. Certain dividends received from foreign firms (those that do not have tax treaties and
PFICs)89 are not eligible for these lower rates. Dividends paid by firms that inverted after the date
of enactment of P.L. 115-97 are added to the list of those not eligible for the lower rates.
In 2004, an excise tax of 15% was imposed on stock compensation received by insiders in an
expatriated corporation; the new law increases it to 20%, effective on the date of enactment for
corporations that first become expatriated after that date.

89 A PFIC is a passive foreign investment company, a foreign corporation that primarily holds passive assets. It does
not fall under CFC rules, but has a separate set of anti-avoidance rules that generally were not changed by the new law.
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Inversions After the Act
As noted earlier, aggregate data for 2018 and 2019 showed a decline in foreign acquisitions, but
there are also indications that most tax-motivated inversions had already been discouraged by the
2016 regulations. Considering announcements of individual companies, one planned inversion,
by Assurant, Inc. was revised to retain the headquarters in the United States.90 Ohio-based Dana,
Inc. announced plans to merge and move the headquarters to the U.K., although the merger would
leave the U.S. shareholders with less than 60% ownership, and therefore not make them subject to
anti-inversion penalties.91 A recent announcement indicated that the Dana merger was cal ed off.92
Some firms may be considering reversing their headquarters decisions.93
Policy Options
The AJCA was successful at limiting a form of inversions, at least initial y. In particular, the
AJCA stopped the practice of basic “naked inversions,” in which little activity or presence in the
new jurisdiction is required and the new parent is domiciled in a tax haven. Further, through
regulation, Treasury has limited the use of the substantial business activity test safe harbor to
invert. Recent activity (as noted above), however, suggests that mergers continued to be used as a
vehicle for corporate inversions after these changes.
These more recent mergers have increasingly resulted in a U.K. parent company (e.g., FMC-
Technip, HIS-Markit), due to policy decisions by the U.K. government. Specifical y, the U.K.
lowered its corporate tax rate and adopted a territorial tax system. In addition, anti-abuse
provisions for foreign source income were weakened by the European Union courts. The U.K.
has also proposed taxing certain intangible income at a 10% rate. (This is referred to as a patent
box.)94
To restrict the occurrence of tax-motivated inversions, both a general reform of the U.S. corporate
tax and specific provisions to deal with tax-motivated international mergers were discussed.
Some important changes were made in 2017; other options remain.
U.S. Corporate Tax Reform and the 2017 Act
Interest in reforming the corporate income tax was long-standing,95 including cal ing for explicit
accommodation of international concerns.96 As noted earlier, two aspects of the U.S. corporate tax

90 See Assurant and T he Warranty Group Amend Deal Structure, Business Wire, January 9, 2018, at
https://www.businesswire.com/news/home/20180109005906/en/Assurant -Warranty-Group-Amend-Deal-Structure.
91 Chester Dawson and T heo Francis, “Despite U.S. T ax Overhaul, Ohio -Based Dana Considers a Move Abroad,” Wall
Street Journal, March 9, 2018, at https://www.wsj.com/articles/dana-to-take-over-gkns-automotive-driveline-business-
1520614366.
92 DANA, “Dana Comments on Decision by GKN Shareholders,” news release, at https://danaincorporated.gcs-
web.com/news-releases/news-release-details/dana-comments-decision-gkn-shareholders-0.
93 David Morgan, “U.S. T ax Cuts Prompt Rethink by Some ‘Inverted’ Companies,” Reuters, August 3, 2018,
https://www.reuters.com/article/us-usa-tax-inversions/u-s-tax-cuts-prompt-rethink-by-some-inverted-companies-
idUSKBN1KO2HH.
94 CRS Report R44522, A Patent/Innovation Box as a Tax Incentive for Domestic Research and Development, by Jane
G. Gravelle.
95 CRS Report RL34229, Corporate Tax Reform: Issues for Congress, by Jane G. Gravelle.
96 CRS Report RL34115, Reform of U.S. International Taxation: Alternatives, by Jane G. Gravelle.
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system are particularly relevant to corporate location decisions: the corporate tax rate and the
taxation of foreign-source earnings. Taken together, these factors, under prior law, could yield a
substantial reduction in taxes paid. In the case of the proposed merger of Forest Laboratories Inc.
(a U.S. company) and Actavis (an Irish company) in 2014, the tax reduction was estimated to be
roughly $100 mil ion per year.97
Lowering the Corporate Tax Rate
Prior to the 2017 changes, the U.S. corporate statutory tax rate was higher than both the average
statutory rates of the other Organisation for Economic Co-operation and Development (OECD)
countries and that of the 15 largest economies in the world.98 Many asserted that the U.S.
statutory tax rate needed to be lowered to reduce the incentive for inversion transactions.99 With
the rate lowered from 35% to 21%, the combined central and subnational corporate tax rates are
similar to most rates in the OECD.100 While lowering the corporate tax rate would reduce the
incentive to invert, there are reasons to suggest that it would be impractical to reduce the rate to
the level needed to stop inversions. Namely, to stop inversions through a reduction in the
corporate tax rate would require a U.S. corporate tax rate set equal to the lowest tax rate of a
destination company, or zero.
A lower corporate tax rate alone reduced the incentive for corporate inversions, primarily by
reducing the tax rate applied to repatriated earnings.101 For a company like Pfizer, with large
foreign earnings, a rate reduction could yield significantly lower taxes paid. However, as
discussed below, the benefit of a lowered rate is negligible relative to the benefit to corporate
taxpayers afforded by territorial tax systems, when income earned in low- or no-tax foreign
jurisdictions is never subject to U.S. tax.
Two factors present chal enges for lowering the corporate tax rate further. First, if revenue
neutrality is a goal, there may not be enough base-broadening provisions with revenue offsets to
provide deep cuts in the corporate tax; and, if such offsets were found, they might have their own
consequences for investment. Reducing the corporate tax without corresponding base broadening
would likely reduce corporate tax revenue, adding to chronic budget deficits.
Adopt a Territorial Tax System
Prior to the 2017 revision, the United States was one of the few countries that had a worldwide
tax system and levied a tax on the foreign-source income of domestic corporations. Changing
corporate tax residence to a country with a territorial tax system (where foreign earnings would
not be taxed at al ) was thought to drive inversion decisions. This issue led to proposals for the
United States to adopt a territorial tax system to stop inversion transactions.102

97 Forest Labs, Acquisition of Forest Laboratories, Inc. by Actavis Plc Call, February 18, 2014, http://www.sec.gov/
Archives/edgar/data/38074/000119312514058927/d679348d425.htm.
98 CRS Report R41743, International Corporate Tax Rate Comparisons and Policy Implications, by Jane G. Gravelle.
99 Hank Gutman, Principal, Director of the T ax Governance Institute, KPMG LLP, Changes in the Tax Law: How Are
Effects Measured, and Who is Affected?, May 2, 2014.
100 OECD.Stat, T able 11.1 Statutory Corporate Income T ax Rate, https://stats.oecd.org/index.aspx?DataSetCode=
T ABLE_II1, site visited March 5, 2019.
101 A corporate rate reduction would also reduce taxes due on U.S. earnings. T his is incidental to a corporation’s
incentive to invert or its competitiveness, because there is no difference of the taxation of U.S. earnings between U.S.
and foreign corporations.
102 McBride (2014).
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One concern about adopting a territorial tax system is the strain it would likely place on the
current transfer pricing system.103 From this perspective, the worldwide tax system provided a
backstop on the amount of profit shifting or base erosion possible, because shifted profits wil
eventual y be repatriated. Under a territorial tax system, this is not the case. Research has found
evidence of significant profit shifting, especial y related to mobile intellectual property,
suggesting a lot of income from foreign sources is real y U.S. income in disguise.104
Numerous other issues surround the adoption of a U.S. territorial tax. For example, while some
supported a territorial tax to eliminate the incentive to keep earnings abroad, others opposed it
because it likely discourages domestic investment and activity in the United States.105
The revisions in 2017 maintained a worldwide system, but with some changes. Income from U.S.
subsidiaries is taxed on a current basis but at a lower rate and with an exemption for a deemed
return on tangible assets. It also provided a subsidy for locating intangible assets with earnings
from abroad in the United States. Many of the inverting firms had significant intangible assets,
and it is not clear whether this new regime (a lower tax rate but on a current basis) is more or less
generous to firms considering inverting.
Tax Reform Proposals
Moving closer to a pure territorial tax, as in the case of a rate reduction, would likely reduce
corporate tax revenue and add to current budget pressures unless it is offset by other tax
increases, although this effect would be less costly at the lower 21% tax rate. In 2027, GILTI is
projected to raise $21 bil ion.106 GILTI could be retained and the rate lowered or the temporarily
lower rate could be made permanent.
There has been some agreement that adopting a territorial tax without some significant anti-abuse
provisions could be problematic, as it would likely increase profit shifting abroad by U.S.
firms.107

103 Gutman (2014).
104 See CRS Report R40623, Tax Havens: International Tax Avoidance and Evasion , by Jane G. Gravelle for a review
of methods and the empirical evidence on profit shiftin g by U.S. multinational firms.
105 A territorial tax lowers the tax on returns to investment abroad, increasing after -tax returns and encouraging firms to
displace domestic investment with foreign investment.
106 See Joint Committee on T axation, General Explanation of P.L. 115-97, December 20, 2018, at https://www.jct.gov/
publications.html?func=startdown&id=5152.
107 All of the proposals to move to a territorial tax have been accompanied by provisions that attempt to limit profit
shifting, particularly of intangible income. See CRS Report R42624, Moving to a Territorial Incom e Tax: Options and
Challenges, by Jane G. Gravelle for further discussion. Such measures were in the 2014 bill introduced by then Ways
and Means Chairman Dave Camp, U.S. Congress, Joint Committee on T axation, Technical Explanation of the T ax
Reform Act of 2014, A Discussion Draft of the Chairman of the House Committee on Ways and Means to Reform the
Internal Revenue Code: T itle IV—Participation Exemption System for the T axation of Foreign Income, committee
print, 113th Cong., February 26, 2014, JCX-15-14. T he Senate Finance Committee also issued several tax reform
discussion drafts in 2013 that proposed, in the international arena, a current but lower tax on foreign source income
(without specifying the type of corporate tax that would be feasible). See United States Committee on Finance, Baucus
Unveils Proposals for International Tax Reform, http://www.finance.senate.gov/newsroom/chairman/release/?id=
f946a9f3-d296-42ad-bae4-bcf451b34b14. T he Finance Committee set up working groups in 2015 and the international
group reported a general framework, where moving to some form of hybrid territorial tax system was discussed. Senate
Finance Committee, International T ax Reform Working Group: Final Report, Senator Rob Portman and Senator
Charles Schumer, Co-Chairs, July 2015, http://www.finance.senate.gov/newsroom/chairman/release/?id=e9eefc66-
7e11-4276-939f-3eca6fd6d959.
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Targeted Approaches
Evidence suggests that administrative remedies were successful at dramatical y slowing
inversions; the targeted legislative changes in the 2017 Act may have had some impact as wel .
There are further changes that could be made to discourage inversions. This section discusses the
history of these proposals, both legislative and administrative.
One approach would be to extend the rate recapture enacted in the 2017 Act for a period longer
than 10 years, or to make it apply indefinitely to future inversions.
A second alternative is to directly restrict the ability of U.S. firms to invert by merger. The
President’s FY2015, FY2016, and FY2017 budget proposals contained a provision that would
have further restricted the use of inversions.108 The proposal would modify the 80% test enacted
in the AJCA to a 50% test and eliminate the 60% test. In effect, this proposal would reduce the
percentage of shareholders that are owners of the “old U.S. company” and the “new foreign
merged company.” The proposal would also require that the new foreign corporation be managed
and controlled from outside the United States and prohibit transactions where the new foreign
company has substantial business activities in the United States. In November 2015, then-Senate
Finance Committee Chairman Hatch indicated the possibility of adding an anti-inversion
provision to legislation to extend expired provisions.109
Many of these bil s were introduced in the 115th Congress.
 H.R. 1931 (Doggett), the Corporate EXIT Fairness Act, and H.R. 3434 (Levin)
and S. 1636 (Durbin, along with a number of cosponsors), the Stop Corporate
Inversions Act, would have treated al mergers as U.S. firms when the U.S. firm’s
shareholders hold more than 50% or when management and control primarily
takes place in the United States.
 H.R. 1932 (Doggett) and S. 851 (Whitehouse), as with bil s introduced in the
114th Congress, would have included anti-inversion provisions as part of a
broader proposal to address tax havens and deferral.
 H.R. 3603 (Levin) would have addressed earnings stripping of inverted
corporations. H.R. 3424 (DeLauro) would disal ow federal contracts for inverted
firms.
 H.R. 1451 (Schakowsky) and S. 586 (Sanders) would make major changes in the
tax treatment of foreign source income and include anti-inversion rules.
Following the change in the international system adopted at the end of 2017, Representative
Doggett and Senator Whitehouse introduced the “No Tax Break for Outsourcing Act” (H.R. 5108,
S. 2459) which, in addition to other changes, would have treated foreign corporations that are
managed and controlled in the United States as domestic corporations and treated inverted firms

108 Department of the Treasury, General Explanations of the Administration’s Fiscal Year 201 5 Revenue Proposals,
March 2014, http://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2015.pdf;
Department of the T reasury, General Explanations of the Adm inistration’s Fiscal Year 2016 Revenue Proposals,
February 2015, https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2016.pdf;
and Department of the T reasury, General Explanations of the Adm inistration’s Fiscal Year 201 7 Revenue Proposals,
February 2016, https://www.treasury.gov/resource-center/tax-policy/Documents/General-Explanations-FY2017.pdf.
109 Stephen K. Cooper, Kat Lucero, and Kaustuv Basu, Finance Members See International Tax Reform and Extenders
Deal, Tax Notes, November 16, 2015, pp. 896-897.
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as U.S. firms when the shareholders of the former U.S. company own more than 50% of the
shares.
These bil s would have also limited interest deductions in the United States to the proportionate
share of the firm’s assets.110 The last proposal (to al ocate worldwide interest) was in both the
House and Senate versions of the legislation (H.R. 1; 115th Congress) in somewhat different form
but was not retained in the final legislation. While this proposal was not specifical y targeted at
inverted firms it would have increased the restrictions that limit earnings stripping.
Bil s in the 116th and 117th Congresses would treat al mergers as U.S. firms if the U.S. firm’s
shareholders hold more than 50% of the merged company or when management and control
primarily takes place in the United States. In the 117th Congress, bil s containing these provisions
include S. 714 (Whitehouse), S. 991 (Sanders), S. 1501 (Durbin), H.R. 1785 (Doggett), and H.R.
2976 (Doggett). The Biden Administration’s FY2022 budget proposal also includes this
provision.111 S. 714, S. 991, H.R. 1785, and the Administration budget also propose to al ocate
interest deductions among countries based on their share of income. These latter proposals also
include other provisions affecting international taxation that may lead to a need for stricter anti-
inversion rules.112
Administrative Changes
Former President Obama had encouraged Congress to act directly to limit inversions, but had also
indicated on August 6, 2014, that administrative changes to limit inversions were under
examination.113 Prior to that announcement, Steve Shay, a Harvard professor and former
practitioner and Treasury official, outlined two regulatory actions that he believed could be
taken.114 The first would limit earnings stripping by reclassifying debt as equity due to excessive
related party debt in an inversion.115 (The second provision is no longer relevant under the new
international tax regime.)116

110 See https://doggett.house.gov/media-center/press-releases/rep-doggett-sen-whitehouse-introduce-bill-end-tax-
breaks-exporting-jobs. T he allocation of interest in H.R. 5108 and S. 2459 is based on the U.S. domestic corporation’s
share of worldwide earnings before interest, taxes, depreciation, and amortization (EBITDA).
111 U.S. Department of the T reasury, General Explanations of the Administration’s Fiscal Year 2022 Revenue
Proposals, May 2021, https://home.treasury.gov/system/files/131/General-Explanations-FY2022.pdf.
112 See CRS Report R45186, Issues in International Corporate Taxation: The 2017 Revision (P.L. 115-97), by Jane G.
Gravelle and Donald J. Marples; and CRS In Focus IF11809, Trends and Proposals for Corporate Tax Revenue, by
Donald J. Marples and Jane G. Gravelle for a discussion of these proposals.
113 Josh Lederman, “Facing Logjam in Congress, Obama Seeks Steps to Curb T ax Breaks for Firms Moving Overseas,”
U.S. News and World Report, August 5, 2014, http://www.usnews.com/news/politics/articles/2014/08/05/obama-seeks-
executive-ways-to-limit-tax-inversions.
114 Stephen E. Shay, “Mr. Secretary, T ake the T ax Juice Out of Corporate E xpatriations,” Tax Notes, July 28, 2014, pp.
473-479.
115 T his change would be based on authority under Section 385 of the Internal Revenue Code. A somewhat different
technique has been suggested by Steven M. Rosenthal, “Professor Shay Got It Right: T reasur y Can Slow Inversions,”
Tax Notes, September 22, 2014, pp. 1445-1449. T he second related to rules at that time that required certain investment
by U.S. foreign subsidiaries, such as making a loan to the U.S. parent, to be treated as effective taxable repat riations
(dividends). T his change would extend this type of treatment to certain loans of these foreign subsidiaries to other
related parties (such as the new foreign parent). For example, if a foreign subsidiary lent to the new foreign parent and
the new foreign parent in turn lent to the U.S. subsidiary, this loan would be considered a dividend to the U.S. parent. It
would also appear that loans for other purposes, such as buying back stock of the foreign parent, could also be treated
as taxable repatriat ions under regulatory authority.
116 T he second provision related to rules at that time that required certain investment by U.S. foreign subsidiaries, such
as making a loan to the U.S. parent, to be treated as effective taxable repatriations (dividends). T his change would
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A number of other administrative proposals that have been suggested (such as provisions relating
to taxing accumulated deferred earnings) are no longer relevant and others have been adopted in
the regulatory changes discussed above.117
 Expanding the scope of Section 7874 (which treats inverted firms as U.S. firms)
by combining multiple transactions into single ones, or vice versa. The scope of
Section 7874 could also be expanded by treating certain stock as disqualified
(because it is expected to be held temporarily or because it is accompanied by
restrictions on voting rights); this provision was adopted in Treasury regulations;
 Potential y recognizing accumulated deferred earnings as currently taxable under
authority such as Subpart F, Section 367, or other rules (this provision is no
longer relevant with the end of deferral, but it may have influenced the decision
to tax deferred earnings of newly inverted firms at the full 35% rate for the next
10 years);
 Issuing regulations that would general y tighten restrictions on interest
deductions under the thin capitalization rules of Section 163(j). These changes
would probably apply to corporations in general, and not just to inverted
corporations (this change was made in the 2017 tax revision);
 Stricter regulations under Section 367 to immediately include foreign earnings in
the case of actions that attempt to move foreign operations out from under the
U.S. parent. This would make future earnings of these operations nontaxable;
 Strengthening and modernizing the effectively connected income rules that
determined whether trade or business activity is taking place in the United States
by foreign firms; and
 Closely monitoring the creation of non-U.S. subsidiaries owned by the foreign
parent after inversion, and ensuring that assets (including intangibles such as
inventions, knowhow, etc.) transferred from the U.S. firm are transferred at arms-
length prices.

extend this type of treatment to certain loans of these foreign subsidiaries to other related parties (such as the new
foreign parent). For example, if a foreign subsidiary lent to the new foreign parent and the new foreign parent in turn
lent to the U.S. subsidiary, this loan would be considered a dividend to the U.S. parent. It would also appear that loans
for other purposes, such as buying back stock of the foreign parent, could also be treated as taxable repatriations under
regulatory authority. Stephen E. Shay refers to authority in Section 956(e), 7701(l), 7874 (g) and 7805. Some of the
second category of proposals were adopted in T reasury Notice 2014 -52, discussed above, and the April 4, 2016,
T reasury regulation addressed related party debt for U.S. subsidiaries of foreign firms, in general.
117 See Mindy Herzfeld, “What Can T reasury Do About Inversions?” Tax Notes, August 24, 2014, pp. 895-897, who
summarizes the four bullets plus the two proposals of Stephen Shay. For additional prop osals, including those relating
to stockholders, taxes on executives, using definitions of effectively connected income, and enforcing arms-length
transfers of U.S. assets, as well as discussions of regulatory approaches in general, see Joseph DiSciullo, “ Academics
Offer Suggestions for Discouraging Corporate Inversions,” Tax Notes, August 25, 2014, pp. 943- 945; Samuel C.
T hompson, Jr., Letter to Honorable Jacob J. Lew et al., Re Legislative and Administrative Proposals re Inversions,
August 12, 2014; lett er to Jacob J. Lew, from Jeffrey M. Kadet, August 11, 2013; Samuel C. T hompson Jr., “ Professor
Says Debt/Equity Regs can Apply to Inversions,” Tax Notes, April 18, 2014, pp. 883-884; Alex Parker, “Executive
Action on Inversions? Not So Fast,” August 8, 2014, Bloomberg International Blog, http://www.bna.com/executive-
action-inversions-b17179893937; Howard Gleckman, “ Is T reasury About to Curb T ax Inversions on Its Own?” T ax
Policy Center, August 19, 2014, http://www.taxpolicycenter.org/taxvox/treasury-about-curb-tax-inversions-its-own;
and Jeffery M. Kadet, “ Attacking Profit Shifting: T h e Approach Everyone Forgets,” Tax Notes, July 13, 2015, pp. 193-
206.
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There is disagreement among experts about whether the types of regulatory changes discussed in
this section are feasible or desirable.118

118 See, for example, Stuart L. Rosow and Martin T . Hamilton, “A Response to Professor Shay: Leave Inversions to
Congress,” T ax Notes, September 8, 2014, pp. 1187-1190.
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Appendix. Legislative Proposals in the 113th and
114th Congresses
A number of legislative proposals were advanced in 2014, when the wave of inversions through
merger began. Representative Levin, the ranking member of the House Ways and Means
Committee, introduced the Stop Corporate Inversions Act of 2014 (H.R. 4679), which would
have reflected the Administration’s proposed changes, retroactive to May 8, 2014. The inversion
would have not been recognized if the U.S. stockholders had 50% of the shares or if 25% of the
business activity is in the United States. A companion bil , which would have sunset in two years
to provide time for tax reform, was introduced in the Senate by Senator Levin in 2014 (S.
2360).119 The Joint Committee on Taxation estimated the permanent proposal to gain $19.5 bil ion
in revenue over FY2015-FY2024. The two-year proposal would have raise $0.8 bil ion over the
same period.120 In the 114th Congress, these legislative proposals were introduced as H.R. 415
(Levin) and S. 198 (Durbin). Senator Casey proposed an anti-inversion amendment to an
education bil (S. 1177).
In the 114th Congress, H.R. 297 (Doggett) and S. 174 (Whitehouse) included anti-inversion
provisions as part of a broader proposal to address tax haven abuses and restrict the benefits of
deferral. S. 922 (Sanders) and H.R. 1790 (Schakowsky) also included anti-inversion provisions,
as wel as earnings-stripping provisions (discussed below) and broader provisions, including the
repeal of deferral.
In 2014 a number of legislative proposals were introduced that would limit the tax benefits
associated with inversions for certain corporations. For example, H.R. 1554 (Doggett), H.R. 3666
(DeLauro), H.R. 3793 (Maffei), S. 268 (Levin), S. 1533 (Levin), and S. 1844 (Shaheen) would
each treat corporations managed and controlled from the United States as domestic corporations
regardless of their legal tax home or status as an inverted company. This provision was also
included in S. 922 (Sanders) and H.R. 1790 (Schakowsky).
Other proposals in 2014, H.R. 694 (Schakowsky) and S. 250 (Sanders), would have eliminated
deferral (taxing foreign source income currently), in addition to limiting the benefits of inversions
when management and control continues to reside in the United States.
Legislative proposals were also under discussion in 2014 by Representative Levin (announced
July 31, 2014) and by Senator Schumer (announced August 14, 2014) to address earnings
stripping, where foreign parent companies borrow from the U.S. subsidiary to increase interest
deductions and reduce taxable income in the United States. Both of these proposals would have
tightened the rules al owing interest deductions by reducing the current limit on interest
deductions relative to adjusted income from 50% to 25% and repealing an alternative safe-harbor
debt-to-equity test. Both proposals would have also eliminated or limited interest carryforwards.
The Schumer proposal was intended to apparently apply to inverted firms while the Levin
proposal would have applied general y. The Levin proposal would have also limited other
transactions between related parties within the firm that al ow untaxed investment of funds in the
United States. The restrictions on interest in the Levin bil were the same as those initial y
proposed in the House in 2004.121

119 See “Senators Announce Bill to Reduce Corporate Inversion ‘Loophole,’” Tax Notes Today, May 21, 2014.
120 Memorandum from T homas Barthold to Karen McAfee, May 23, 2014, http://democrats.waysandmeans.house.gov/
sites/democrats.waysandmeans.house.gov/files/113-0927%20JCT %20Revenue%20Estimate.pdf.
121 T hese restrictions were, however, removed prior to enactment of the AJCA.
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Senator Schumer introduced his proposal, S. 2786, the Corporate Inverters Earnings Stripping
Reform Act of 2014. Its limits on interest deductions would have applied to inverted firms where
U.S. shareholders own more than 50% of the firm. The restriction also would have applied to
firms that inverted using the substantial business activities test. The bil had nine Democratic
cosponsors; five of them were on the Senate Finance Committee.
In the 114th Congress, S. 922 (Sanders) and H.R. 1790 (Schakowsky) included general earnings-
stripping provisions for firms with a foreign parent. Earnings stripping provisions were also
addressed in the report of the Senate Finance Committee’s working group on Tax Reform.122
H.R. 5278 (DeLauro) and S. 2704 (Levin), introduced May 30, 2014, would have disal owed
awarding federal contracts to inverted firms. These proposals were introduced in the 114th
Congress as H.R. 1809 (DeLauro) and S. 975 (Durbin). In 2014, Senators Brown and Durbin
proposed S. 2895, and Representative Doggett introduced H.R. 5549, the Pay What You Owe
Before You Go Act, that would have taxed the accumulated deferred earnings of inverting firms.
Then Senate Finance Committee Chairman Ron Wyden had proposed having draft legislation in
place in September 2014, and also referred to Schumer’s earnings-stripping proposal.123 Senator
Wyden had previously announced that any changes would be retroactive to May 8, 2014.124

Author Information

Donald J. Marples
Jane G. Gravelle
Specialist in Public Finance
Senior Specialist in Economic Policy

Disclaimer
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan
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under the direction of Congress. Information in a CRS Report should n ot be relied upon for purposes other
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122 Senate Finance Committee, International T ax Reform Working Group: Final Report, Senator Rob Portman and
Senator Charles Schumer, Co-Chairs, July 1015, http://www.finance.senate.gov/newsroom/chairman/release/?id=
e9eefc66-7e11-4276-939f-3eca6fd6d959.
123 T he United States Senate, Committee on Finance, “Wyden Statement Regarding Plans to Address Corporate
Inversions,” press release, August 14, 2014, http://www.finance.senate.gov/newsroom/chairman/release/?id=4ed00da0-
0be6-4f3d-8619-76bf2981d126.
124 Ron Wyden, “We Must Stop Driving Businesses Out of the Country,” The Wall Street Journal, May 8, 2014,
http://online.wsj.com/news/articles/SB10001424052702303701304579548433123065724 .
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R43568 · VERSION 24 · UPDATED
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