H.R. 1931 - Corporate EXpatriates and Inverters Tax (Corporate EXIT) Fairness Act

115TH CONGRESS
1ST SESSION

H.R. 1931

To amend the Internal Revenue Code of 1986 to discourage corporate
inversions and to impose tax on unrepatriated earnings and unrecognized
gains in connection with corporate expatriations.

IN THE HOUSE OF REPRESENTATIVES

APRIL 5, 2017

Mr. DOGGETT (for himself, Mr. BLUMENAUER, Mr. CAPUANO, Mr. CARTWRIGHT,
Ms. JUDY CHU of California, Mr. CICILLINE, Mr. COHEN, Mr. CONYERS, Mr. CUMMINGS,
Mr. DEFAZIO, Ms. DELAURO, Mr. ELLISON, Mr. GARAMENDI, Mr. GENE GREEN of Texas,
Mr. GRIJALVA, Ms. EDDIE BERNICE JOHNSON of Texas, Mr. JOHNSON of Georgia,
Ms. KAPTUR, Mr. KILDEE, Mr. LARSON of Connecticut, Ms. LEE, Mr. LEWIS of Georgia,
Mr. LOEBSACK, Mr. LYNCH, Ms. MOORE, Mrs. NAPOLITANO, Ms. NORTON, Mr. POCAN,
Mr. RASKIN, Ms. ROYBAL-ALLARD, Ms. SCHAKOWSKY, Ms. SLAUGHTER, Mr. THOMPSON
of California, Mr. TONKO, Ms. VELAZQUEZ, Mrs. WATSON COLEMAN, Mr. WELCH,
Mr. GUTIERREZ, Mr. YARMUTH, Mr. NADLER, Mr. SCOTT of Virginia, Mr. PAYNE,
Ms. MCCOLLUM, Ms. PINGREE, Mr. PASCRELL, Mr. LIPINSKI, and Mr. SARBANES)
introduced the following bill; which was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to discourage corporate inversions and to impose tax on unrepatriated earnings and unrecognized gains in connection with corporate expatriations.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the ‘‘Corporate EXpatriates and Inverters Tax Fairness Act’’ or as the ‘‘Corporate EXIT Fairness Act’’.

SEC. 2. RULES TO DISCOURAGE CORPORATE INVERSIONS AND IMPOSE TAX ON UNREPATRIATED EARNINGS AND UNRECOGNIZED GAINS IN CONNECTION WITH CORPORATE EXPATRIATIONS.

(a) RULES RELATING TO CORPORATE INVERSIONS AND CORPORATE EXPATRIATIONS COMPLETED AFTER JANUARY 4, 2017. — Subchapter C of chapter 80 of the Internal Revenue Code of 1986 is amended by adding at the end the following new section:

‘‘SEC. 7874A. RULES RELATING TO CORPORATE INVERSIONS AND CORPORATE EXPATRIATIONS.

‘‘(a) UNREPATRIATED EARNINGS AND UNRECOGNIZED GAINS IN CONNECTION WITH CORPORATE EXPATRIATION. —

‘‘(1) IN GENERAL. — In the case of a corporate expatriation —

‘‘(A) the subpart F income of any applicable controlled foreign corporation for its last taxable year ending before the acquisition date shall be increased by the accumulated deferred foreign income of such corporation, and

‘‘(B) any gain position stock of any applicable controlled foreign corporation which is held by an expatriated entity on the acquisition date shall be treated as sold on such date for its fair market value.

‘‘(2) RULES RELATED TO RECOGNITION OF GAIN. —

‘‘(A) APPLICATION TO DISPOSITIONS DURING 5 YEARS BEFORE ACQUISITION DATE. — In the case of any disposition of gain position stock of any applicable controlled foreign corporation by an expatriated entity at any time during the 5-year period ending on the acquisition date with respect to a corporate expatriation, such disposition shall be treated as a sale of such stock for its fair market value and the period of limitation on assessment and collection of any tax with respect to such disposition under section 6501 or 6502 shall commence not earlier than the acquisition date.

‘‘(B) GAIN POSITION STOCK. — For purposes of this subsection, the term ‘gain position stock’ means any stock if gain would arise from the sale of such stock.

‘‘(C) GAIN TAKEN INTO ACCOUNT; PROPER ADJUSTMENT. — Notwithstanding any other provision of this title, in the case of any sale under paragraph (1)(B) or (2)(A), any gain arising from such sale shall be taken into account for the taxable year of the sale. In the case of any sale under paragraph (1)(B), proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain taken into account under the preceding sentence.

‘‘(b) FOREIGN PARENT TREATED AS DOMESTIC CORPORATION. — Notwithstanding section 7701(a)(4) —

‘‘(1) APPLICATION TO CORPORATE INVERSIONS. — In the case of a corporate inversion, the foreign corporation making the acquisition described in subsection (c)(1) shall be treated for purposes of this title as a domestic corporation.

‘‘(2) ELECTIVE APPLICATION TO CORPORATE EXPATRIATIONS. — If the common parent of the expanded affiliated group which includes the foreign corporation making the acquisition in a corporate expatriation elects the application of this paragraph and enters into an agreement with the Secretary providing the Secretary such assurances as the Secretary may require that the application of paragraph (1) will be administrable and enforceable with respect to such corporation —

‘‘(A) such foreign corporation shall be treated for purposes of this title as a domestic corporation, and

‘‘(B) subsection (a) shall not apply with respect to such corporate expatriation.

‘‘(c) CORPORATE INVERSION; CORPORATE EXPATRIATION. — For purposes of this section —

‘‘(1) CORPORATE INVERSION. — The term ‘corporate inversion’ means the direct or indirect acquisition (pursuant to a plan or a series of related transactions) of substantially all of the assets of a domestic corporation or domestic partnership, substantially all of the trade or business assets of a domestic corporation or domestic partnership, or substantially all of the United States trade or business assets of a foreign partnership, by a foreign corporation if —

‘‘(A) such acquisition is completed after January 4, 2017,

‘‘(B) after the acquisition the expanded affiliated group which includes the foreign corporation does not have substantial business activities in the foreign country in which, or under the law of which, the foreign corporation is created or organized, when compared to the total business activities of such expanded affiliated group, and

‘‘(C) after the acquisition, either —

‘‘(i) more than 50 percent of the stock (by vote or value) of the foreign corporation is held —

‘‘(I) in the case of an acquisition with respect to a domestic corporation, by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation, or

‘‘(II) in the case of an acquisition with respect to a partnership, by former partners of the partnership by reason of holding a capital or profits interest in the partnership, or

‘‘(ii) the management and control of the expanded affiliated group which includes the foreign corporation occurs, directly or indirectly, primarily within the United States, and such expanded affiliated group has significant domestic business activities.

‘‘(2) CORPORATE EXPATRIATION. — The term ‘corporate expatriation’ means any acquisition which is not described in paragraph (1) but which would be so described if paragraph (1) were applied without regard to subparagraphs (B) and (C) thereof.

‘‘(3) DETERMINATIONS WITH RESPECT TO MANAGEMENT AND CONTROL AND BUSINESS ACTIVITIES. —

‘‘(A) MANAGEMENT AND CONTROL. — For purposes of paragraph (1)(C)(ii) —

‘‘(i) IN GENERAL. — The Secretary shall prescribe regulations for purposes of determining cases in which the management and control of an expanded affiliated group is to be treated as occurring, directly or indirectly, primarily within the United States.

‘‘(ii) EXECUTIVE OFFICERS AND SENIOR MANAGEMENT. — Such regulations shall provide that the management and control of an expanded affiliated group shall be treated as occurring, directly or indirectly, primarily within the United States if substantially all of the executive officers and senior management of the expanded affiliated group who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the expanded affiliated group are based or primarily located within the United States. Individuals who in fact exercise such day-to-day responsibilities shall be treated as executive officers and senior management regardless of their title.

‘‘(B) SUBSTANTIAL BUSINESS ACTIVITIES. — For purposes of paragraph (1)(B), the term ‘substantial business activities’ shall have the meaning given such term under regulations in effect on January 4, 2017, except that the Secretary may issue regulations increasing the threshold percent in any of the tests under such regulations for determining if business activities constitute substantial business activities for purposes of this subsection.

‘‘(C) SIGNIFICANT DOMESTIC BUSINESS ACTIVITIES. — For purposes of paragraph (1)(C)(ii), an expanded affiliated group has significant domestic business activities if at least 25 percent of —

‘‘(i) the employees of the group are based in the United States,

‘‘(ii) the employee compensation incurred by the group is incurred with respect to employees based in the United States,

‘‘(iii) the assets of the group are located in the United States, or

‘‘(iv) the income of the group is derived in the United States,

determined in the same manner as such determinations are made for purposes of determining substantial business activities under regulations referred to in subparagraph (B) as in effect on January 4, 2017, but applied by treating all references in such regulations to ‘foreign country’ and ‘relevant foreign country’ as references to ‘the United States’. The Secretary may issue regulations decreasing the threshold percent in any of the tests under such regulations for determining if business activities constitute significant domestic business activities for purposes of this subsection.

‘‘(4) CERTAIN STOCK DISREGARDED. — There shall not be taken into account in determining ownership under paragraph (1)(C)(i) —

‘‘(A) stock held by members of the expanded affiliated group which includes the foreign corporation, or

‘‘(B) stock of such foreign corporation which is sold in a public offering related to the acquisition described in the matter preceding subparagraph (A) of paragraph (1).

‘‘(5) PLAN DEEMED IN CERTAIN CASES. — If a foreign corporation completes an acquisition which would be described in paragraph (1) or (2) if such acquisition were pursuant to a plan and such acquisition is completed —

‘‘(A) in the case of an acquisition which would be so described in paragraph (1), during the 4-year period beginning on the date which is 2 years before the ownership requirements of paragraph (1)(C)(i) are met, or

‘‘(B) in the case of an acquisition which would be so described in paragraph (2), during the 4-year period ending on the acquisition date, such acquisition shall be treated as pursuant to a plan.

‘‘(6) CERTAIN TRANSFERS DISREGARDED. — The transfer of properties or liabilities (including by contribution or distribution) shall be disregarded if such transfers are part of a plan a principal purpose of which is to avoid the purposes of this section.

‘‘(7) SPECIAL RULE FOR RELATED PARTNERSHIPS. — For purposes of applying paragraph (1)(C)(i) to the acquisition of a trade or business of a partnership, except as provided in regulations, all partnerships which are under common control (within the meaning of section 482) shall be treated as 1 partnership.

‘‘(8) REGULATIONS. — The Secretary shall prescribe such regulations as may be appropriate to determine whether any transaction or series of transactions is a corporate inversion or corporate expatriation, including regulations —

‘‘(A) to treat warrants, options, contracts to acquire stock, convertible debt interests, and other similar interests as stock, and

‘‘(B) to treat stock as not stock.

‘‘(d) OTHER DEFINITIONS. — For purposes of this section —

‘‘(1) ACCUMULATED DEFERRED FOREIGN INCOME. —

‘‘(A) IN GENERAL. — The term ‘accumulated deferred foreign income’ means the excess of —

‘‘(i) the undistributed earnings of the controlled foreign corporation, over

‘‘(ii) the undistributed U.S. earnings of such controlled foreign corporation.

‘‘(B) UNDISTRIBUTED EARNINGS. — The term ‘undistributed earnings’ means the earnings and profits of the controlled foreign corporation described in section 959(c)(3), determined —

‘‘(i) as of the close of the taxable year described in subparagraph (A),

‘‘(ii) without diminution by reason of distributions made during such taxable year, and

‘‘(iii) without regard to this paragraph.

For purposes of this chapter, any determination with respect to the treatment of distributions described in clause (ii) shall be made after the application of this paragraph to the earnings and profits described in the matter preceding clause (i).

‘‘(C) UNDISTRIBUTED U.S. EARNINGS. — The term ‘undistributed U.S. earnings’ has the meaning given the term ‘post-1986 undistributed U.S. earnings’ in paragraph (5) of section 245(a), determined —

‘‘(i) as of the close of the taxable year described in subparagraph (A) of this paragraph, and

‘‘(ii) without regard to ‘post-1986’ each place it appears in the matter before subparagraph (A) of such paragraph (5).

‘‘(2) APPLICABLE CONTROLLED FOREIGN CORPORATION. — The term ‘applicable controlled foreign corporation’ means, with respect to any expatriated entity, any controlled foreign corporation with respect to which such entity was a United States shareholder at any time during the 5-year period ending on the acquisition date.

‘‘(3) EXPATRIATED ENTITY. — The term ‘expatriated entity’ means —

‘‘(A) the corporation or partnership referred to in the matter preceding subparagraph (A) of subsection (c)(1) (including with respect to the application of such subsection pursuant to subsection (c)(2)), and

‘‘(B) any United States person who is related (within the meaning of section 267(b) or 707(b)(1)) to a corporation or partnership described in subparagraph (A).

‘‘(4) ACQUISITION DATE. — The term ‘acquisition date’ means the date on which the acquisition described in paragraph (1) or (2) of subsection (c), as the case may be, is completed.

‘‘(5) EXPANDED AFFILIATED GROUP. — The term ‘expanded affiliated group’ means an affiliated group as defined in section 1504(a) but without regard to section 1504(b)(3), except that section 1504(a) shall be applied by substituting ‘more than 50 percent’ for ‘at least 80 percent’ each place it appears.

‘‘(e) SPECIAL RULES. —

‘‘(1) CREDITS NOT ALLOWED AGAINST TAX ON UNREPATRIATED EARNINGS AND UNRECOGNIZED GAINS. — In the case of any expatriated entity and any United States shareholder of an applicable controlled foreign corporation, credits (other than the credit allowed by section 901) shall be allowed against the tax imposed by chapter 1 on such entity or corporation for any taxable year with respect to which any amount is included in income under subsection (a) only to the extent such tax exceeds the product of —

‘‘(A) the amount so included in income, and

‘‘(B) the highest rate of tax specified in section 11(b)(1).

For purposes of determining the credit allowed by section 901, such income shall be treated as from sources within the United States.

‘‘(2) COORDINATION WITH SECTION 172 AND MINIMUM TAX. — Rules similar to the rules of paragraphs (3) and (4) of section 860E(a) shall apply for purposes of subsection (a).

‘‘(f) SPECIAL RULE FOR TREATIES. — Nothing in section 894 or 7852(d) or in any other provision of law shall be construed as permitting an exemption, by reason of any treaty obligation of the United States heretofore or hereafter entered into, from the provisions of this section.

‘‘(g) REGULATIONS. — The Secretary shall provide such regulations as are necessary to carry out this section, including regulations providing for such adjustments to the application of this section as are necessary to prevent the avoidance of the purposes of this section, including the avoidance of such purposes through —

‘‘(1) the use of related persons, pass-through or other noncorporate entities, or other intermediaries, or

‘‘(2) transactions designed to have persons cease to be (or not become) members of expanded affiliated groups or related persons.’’.

(b) MODIFICATIONS TO RULES RELATING TO CORPORATE INVERSIONS COMPLETED ON OR BEFORE JANUARY 4, 2017. —

(1) IN GENERAL. — Subsection (b) of section 7874 of the Internal Revenue Code of 1986 is amended to read as follows:

‘‘(b) INVERTED CORPORATIONS TREATED AS DOMESTIC CORPORATIONS. —

‘‘(1) IN GENERAL. — Notwithstanding section 7701(a)(4), a foreign corporation shall be treated for purposes of this title as a domestic corporation if —

‘‘(A) such corporation would be a surrogate foreign corporation if subsection (a)(2) were applied by substituting ‘80 percent’ for ‘60 percent’, or

‘‘(B) such corporation is an inverted domestic corporation.

‘‘(2) INVERTED DOMESTIC CORPORATION. — For purposes of this subsection, a foreign corporation shall be treated as an inverted domestic corporation if, pursuant to a plan (or a series of related transactions) —

‘‘(A) the entity completes after May 8, 2014, and on or before January 4, 2017, the direct or indirect acquisition of —

‘‘(i) substantially all of the assets of a domestic corporation or domestic partnership,

‘‘(ii) substantially all of the trade or business assets of a domestic corporation or domestic partnership, or

‘‘(iii) substantially all of the United States trade or business assets of a foreign partnership, and

‘‘(B) after the acquisition, either —

‘‘(i) more than 50 percent of the stock (by vote or value) of the entity is held —

‘‘(I) in the case of an acquisition with respect to a domestic corporation, by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation, or

‘‘(II) in the case of an acquisition with respect to a partnership, by former partners of the partnership by reason of holding a capital or profits interest in the partnership, or

‘‘(ii) the management and control of the expanded affiliated group which includes the entity occurs, directly or indirectly, primarily within the United States, and such expanded affiliated group has significant domestic business activities.

‘‘(3) EXCEPTION FOR CORPORATIONS WITH SUBSTANTIAL BUSINESS ACTIVITIES IN FOREIGN COUNTRY OF ORGANIZATION. — A foreign corporation described in paragraph (2) shall not be treated as an inverted domestic corporation if after the acquisition the expanded affiliated group which includes the entity has substantial business activities in the foreign country in which or under the law of which the entity is created or organized when compared to the total business activities of such expanded affiliated group. For purposes of subsection (a)(2)(B)(iii) and the preceding sentence, the term ‘substantial business activities’ shall have the meaning given such term under regulations in effect on May 8, 2014, except that the Secretary may issue regulations increasing the threshold percent in any of the tests under such regulations for determining if business activities constitute substantial business activities for purposes of this paragraph.

‘‘(4) MANAGEMENT AND CONTROL. — For purposes of paragraph (2)(B)(ii) —

‘‘(A) IN GENERAL. — The Secretary shall prescribe regulations for purposes of determining cases in which the management and control of an expanded affiliated group is to be treated as occurring, directly or indirectly, primarily within the United States. The regulations prescribed under the preceding sentence shall apply to periods after May 8, 2014.

‘‘(B) EXECUTIVE OFFICERS AND SENIOR MANAGEMENT. — Such regulations shall provide that the management and control of an expanded affiliated group shall be treated as occurring, directly or indirectly, primarily within the United States if substantially all of the executive officers and senior management of the expanded affiliated group who exercise day-to-day responsibility for making decisions involving strategic, financial, and operational policies of the expanded affiliated group are based or primarily located within the United States. Individuals who in fact exercise such day-to-day responsibilities shall be treated as executive officers and senior management regardless of their title.

‘‘(5) SIGNIFICANT DOMESTIC BUSINESS ACTIVITIES. — For purposes of paragraph (2)(B)(ii), an expanded affiliated group has significant domestic business activities if at least 25 percent of —

‘‘(A) the employees of the group are based in the United States,

‘‘(B) the employee compensation incurred by the group is incurred with respect to employees based in the United States,

‘‘(C) the assets of the group are located in the United States, or

‘‘(D) the income of the group is derived in the United States,

determined in the same manner as such determinations are made for purposes of determining substantial business activities under regulations referred to in paragraph (3) as in effect on May 8, 2014, but applied by treating all references in such regulations to ‘foreign country’ and ‘relevant foreign country’ as references to ‘the United States’. The Secretary may issue regulations decreasing the threshold percent in any of the tests under such regulations for determining if business activities constitute significant domestic business activities for purposes of this paragraph.’’.

(2) CONFORMING AMENDMENTS. —

(A) Clause (i) of section 7874(a)(2)(B) of such Code is amended by striking ‘‘after March 4, 2003,’’ and inserting ‘‘after March 4, 2003, and before May 9, 2014,’’.

(B) Subsection (c) of section 7874 of such Code is amended —

(i) in paragraph (2) —

(I) by striking ‘‘subsection (a)(2)(B)(ii)’’ and inserting ‘‘subsections (a)(2)(B)(ii) and (b)(2)(B)(i)’’, and

(II) by inserting ‘‘or (b)(2)(A)’’ after ‘‘(a)(2)(B)(i)’’ in subparagraph (B),

(ii) in paragraph (3), by inserting ‘‘or (b)(2)(B)(i), as the case may be,’’ after ‘‘(a)(2)(B)(ii)’’,

(iii) in paragraph (5), by striking ‘‘subsection (a)(2)(B)(ii)’’ and inserting ‘‘subsections (a)(2)(B)(ii) and (b)(2)(B)(i)’’, and

(iv) in paragraph (6), by inserting ‘‘or inverted domestic corporation, as the case may be,’’ after ‘‘surrogate foreign corporation’’.

(c) TECHNICAL AND CONFORMING AMENDMENTS RELATED TO STOCK COMPENSATION OF INSIDERS IN EXPATRIATED CORPORATIONS. —

(1) Section 4985(a)(1) of such Code is amended by striking ‘‘section 1(h)(1)(C)’’ and inserting ‘‘section 1(h)(1)(D)’’.

(2) Section 4985(c) of such Code is amended by inserting ‘‘or section 7874A(c)(1) (without regard to subparagraph (C) thereof)’’ after ‘‘section 7874(a)(2)(B)(i)’’.

(3) Section 4985(e)(2)(A) of such Code is amended by inserting ‘‘or section 7874A(d)(3)’’ after ‘‘section 7874(a)(2)’’.

(d) CLERICAL AMENDMENTS. —

(1) The heading for section 7874 of such Code is amended by striking ‘‘EXPATRIATED ENTITIES AND THEIR FOREIGN PARENTS’’ and inserting ‘‘CORPORATE INVERSIONS COMPLETED ON OR BEFORE JANUARY 4, 2017’’.

(2) The table of sections for subchapter C of chapter 80 of such Code is amended by striking the item relating to section 7874 and inserting the following new items:

‘‘Sec. 7874. Rules relating to corporate inversions completed on or before January 4, 2017.

‘‘Sec. 7874A. Rules relating to corporate inversions and corporate expatriations.’’.

(e) EFFECTIVE DATE. —

(1) IN GENERAL. — Except as provided in paragraph (2), the amendments made by this section shall apply taxable years ending after January 4, 2017.

(2) MODIFICATIONS TO RULES RELATING TO CORPORATE INVERSIONS COMPLETED ON OR BEFORE JANUARY 4, 2017. — The amendments made by subsection (b) shall apply to taxable years ending after May 8, 2014.