What is a corporate inversion and why was this provision enacted?

Question

What will be an ideal response?

Answer 1

In a corporate inversion, a U.S. corporation with substantial foreign-source income reorganizes as a foreign corporation in order to avoid U.S. tax on foreign income. The U.S. corporation merges into a foreign-owned entity or transfers substantially all of its assets into the foreign corporation.

Congress enacted two provisions to prevent the erosion of the U.S. corporate tax base. Under the first provision, a foreign corporation will be deemed to be a U.S. corporation for U.S. tax purposes if (1) the foreign corporation acquired substantially all the assets of the U.S. corporation, (2) former shareholders of the U.S. corporation own 80% or more (by vote or value) of stock in the foreign corporation by reason of their U.S. stock ownership, and (3) the foreign corporation and its affiliates do not conduct substantial business in the foreign country of incorporation. If these requirements are met, the IRS will disregard the inversion and continue to treat the corporation as a U.S. corporation.

The second provision prevents taxpayers from using a U.S. corporation's otherwise available tax attributes to offset income recognized in an inversion transaction for a ten-year period. A corporation is subject to this provision if (1) the foreign corporation acquired substantially all the assets of the U.S. corporation, (2) former shareholders of the U.S. corporation own between 60 and 80% (by vote or value) of stock in the foreign corporation by reason of their U.S. stock ownership, and (3) the foreign corporation and its affiliates do not conduct substantial business in the foreign country of incorporation. This provision prohibits a U.S. corporation from using a net operating loss and/or foreign tax credit to reduce its tax on the inversion transaction.