Senate Committee Targets ?Tax Havens'

The goal of the legislation is to prevent transactions that "strip" earnings out of U.S. subsidiaries of insurers based in certain foreign jurisdictions, thus avoiding U.S. taxation.

The legislation also seeks to prevent all U.S. companies, not just insurers, from avoiding U.S. taxation by inverting their residences to tax havens in order to avoid taxation.

The legislation is called the Reversing the Expatriation of Profits Offshore Act (REPO), S. 2119. The legislation is viewed as having a good chance of enactment.

Sen. Grassley is the ranking Republican on the Finance Committee, while Sen. Baucus is the Committee's chairman.

In a statement on the floor of the Senate, Sen. Baucus specifically cited Bermuda as a tax haven country that is popular among those interested in corporate inversions.

"Tax avoidance costs honest taxpayers tens of billions of dollars each year," he said. "When one taxpayer, whether a corporation or an individual, doesn't pay its fair share of taxes, we all pay."

He said the companies reincorporating in tax havens such as Bermuda are still physically located in the United States.

"Their executives and employees enjoy all the privileges afforded to honest U.S. taxpayers," Sen. Baucus said.

The part of S. 2119 targeted at reinsurance transactions involves Section 845(a) of the tax code. Currently, Section 845(a) allows the IRS to allocate income, such as premiums, investment gains deductions, reserves, credits and others, among related parties in a reinsurance transaction to properly reflect the "source and character" of taxable income.

Under S. 2119, the IRS would be allowed to make allocations to reflect the proper source, character and "amount" of taxable income.

The new treatment would apply to all risks reinsured after April 11, 2002.

As for the inversion language, S. 2119 would target two types of inversions. A "pure" inversion is one in which a U.S. company, in effect, shifts its domestication to a foreign country and at least 80 percent of the shareholders in the original U.S. company are shareholders in the new foreign company.

In addition, the new company has no substantial business activity in the foreign country. Under these circumstances, the company will be treated, for tax purposes, as a U.S. company.

A limited inversion is defined as when between 50 and 80 percent of the shareholders are the same following the residence change. Following a limited inversion, the foreign company will be barred from using such devices as net operating losses and foreign tax credits to offset the gain incurred upon inverting.