The Buzz about IRC § 7874

IRC § 7874: Rules relating to expatriated entities and their foreign parents.

The recent corporate inversion transactions of many large US corporations has resulted in much discussion and controversy relating to IRC § 7874.
A corporate inversion, also referred to as a tax inversion, is a transaction in which an organization is restructured to relocate the corporation’s legal domicile to a tax haven or country which enacts a lower corporate income tax rate.  

These transactions have become especially desirable to organizations that are involved in the sales of intangible goods, such as pharmaceutical companies because many countries do not tax the income derived from the sales of intangible goods. Additionally, most countries chosen for relocation do not tax worldwide income as the US does. 

Congress’ Joint Committee has estimated that by strengthening current regulations and putting an end to corporate inversions, the US government could recognize a total tax gain of $19.5 billion over the next ten consecutive years. In September of 2014, the IRS released Notice 2014-52 that further restricts inversion transactions.

Despite the federal revision to IRC § 7874 and Notice 2014-52, the number of pending and completed corporate inversions has remained steady over the most recent year. In 2015 alone, there have been two completed corporate inversions and there are currently five inversions pending. In each of these cases, corporate executives and primary business activity remain in the US, and the organization becomes incorporated in countries such as Ireland, The Netherlands, Canada, and England. Each of these regions enforces more favorable corporate income tax laws. 

Since the publication of IRS Notice 2014-52, a few proposals have been brought before Congress to modify IRC § 7874. In January, two members of the House Ways and Means Committee introduced the Stop Corporate Inversion Act of 2015 (H.R. 415) on the same day that two senators introduced a companion Senate bill (S. 198). The passing of this bill would treat a foreign company as a US company if management and control as well as significant business operations remained within the US. 

The Stop Haven Abuse Act (H.R. 297) and companion bill (S. 174) also provides modifications to IRC § 7874, similar to the Corporate Inversion Act of 2015, but would provide additional reporting requirements, and lessen the requirements for corporate income to be taxed in the US.

As corporate inversions become more common and corporations face hundreds of millions of dollars in tax savings each year, it is only a matter of time before the US government enacts major legislation to put an end to corporate inversions.

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