	Introduction

News reports and articles in professional tax journals in the early 2000s drew the attention of policymakers and the public to a phenomenon sometimes called 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. The corporate inversions apparently involve little, if any, shifts in actual economic activity from the United States abroad, at least in the near term. (See, however, the section below on "Policy Issues" for a discussion of possible long-run effects.) This has also led some to draw conclusions about their impact on tax equity: unless federal spending is cut or the deficit is increased, the reduction in tax revenue must be made up by tax increases on other taxpayers. The U.S. Treasury Department views inversions as evidence of competitive problems with the U.S. tax system. U.S. Tax Consequences of Inversions

Given the U.S. tax structure, inversions potentially provide tax savings in two general ways: by reducing U.S. tax on foreign source income; and by reducing U.S. tax on U.S. income that is shifted outside the United States in "earnings stripping" or similar transactions. Under current law, as long as a firm has a dearth of foreign tax credits, at least some U.S. tax burden applies to the firm's foreign income. Thus, one source of tax saving is U.S. tax on foreign income. The ability of firms to defer U.S. tax on subsidiary earnings in low-tax countries reduces the tax burden on foreign investment as do certain U.S. foreign tax credit rules. For example, those that are chiefly concerned about the revenue and tax equity results of inversions make little distinction between inversions' loss of tax revenue from U.S. source-income, on the one hand, and foreign-source income, on the other. The 2002 Treasury Department report, for example, recommended more stringent treatment of U.S.-, but not foreign-source income—for example, more effective measures of limiting earnings-stripping—and called for a general reexamination of the U.S. system of taxing foreign income. 4520 was enacted as the American Jobs Creation Act of 2004 ( P.L. 108-357 ). The second regime would act as a type of toll tax on the shifting of the firm's foreign subsidiaries from the former U.S. parent to the new foreign parent. 4297)

Additional tax legislation aimed at restricting inversions was included as one of several revenue-raising "offsets" in the version of budget reconciliation legislation passed by the Senate in November, 2005. The Senate proposal was not contained in the final version of reconciliation legislation enacted in May 2006 (Tax Increase Prevention and Reconciliation Act; P.L. 109-222 ). 1591 , the supplemental appropriations bill approved by the Senate in March. The inversion measure was not, however, included in the conference agreement reached on H.R. 1591 , nor was it in the small business tax package that Congress ultimately passed as H.R. The May 2002 Treasury Report

The Treasury Department's May 2002 report voiced three principal concerns: that the earnings-stripping opportunities from inversion may erode the part of the U.S. tax base consisting of U.S.-source income; that the current tax system may give foreign-controlled firms a competitive advantage; and that inversions "reduce confidence in the fairness of the tax system." But inversions can be viewed in a broader context. Some observers and policymakers have suggested that the time is right to consider fundamental reform of the U.S. tax system; one approach might be to adopt a territorial tax system under which the United States would exempt foreign business income from tax. Inversions present many of the same policy issues as would be presented by adoption of a territorial system.
In the early 2000s, reports indicated that an increasing number of U.S. firms have altered their structure by substituting a foreign parent corporation for a domestic one. Such "inversions" typically involved the creation of a new foreign corporation in a country with low tax rates (a "tax haven") that becomes the parent of the firm's foreign and U.S. component corporations. A chief motive for inversions was apparently savings by firms on their U.S. corporate income tax. One source of savings was tax on a firm's foreign income: the United States taxes corporations chartered in the United States on both U.S. and foreign income but taxes foreign-chartered corporations only on their U.S.-source income. An inversion can thus potentially reduce a firm's U.S. taxes on foreign income. Other tax savings apparently result from "earnings stripping," or the shifting of U.S.-source income from taxable U.S. components of the firm to the tax-exempt foreign parts.
In the long run, inversions may be accompanied by some increased level of U.S. investment abroad; a firm that inverts reduces its tax burden on foreign investment. However, any such shift may be small, and the recent corporate inversions do not appear to be accompanied by substantive shifts of economic activity from the United States. This leaves the impact of inversions on tax revenues as probably the leading near-term economic effect. As a consequence, one policy issue inversions present is that of tax equity: unless offset by spending cuts or larger budget deficits, the lost revenue is made up with higher taxes on other U.S. taxpayers. Several bills introduced in the 108th Congress appear to have had the revenue losses and tax equity as their primary concern, and tax legislation aimed at restricting inversions was included in the American Jobs Creation Act of 2004 (P.L. 108-357), an omnibus tax bill addressing business and international tax issues. In 2006, additional tax restrictions were proposed in the Senate-passed version of the Tax Increase Prevention and Reconciliation Act (TIPRA; P.L. 109-222) but were not contained in the final act. In March 2007, the Senate passed a tax package that included inversion provisions as part of H.R. 1591, a supplemental appropriations bill. However, the measure was not included in the conference agreement on the bill. There are indications that the 111th Congress may again look to the corporate income tax as an area where revenue-raising measures might be found to offset tax cuts provided elsewhere.
Some have viewed inversions as symptomatic of a burden they believe the U.S. tax system places on the international competitiveness of U.S. firms. A May 2002 U.S. Treasury report saw inversions as just one result of competitive problems posed by U.S. taxes and called for a more general reexamination of the U.S. international tax system. The report's near-term recommendations for more stringent tax rules are confined to changes aimed at protecting the domestic tax base rather than U.S. tax revenue from foreign income. Recent policy discussions of the U.S. international tax system have included calls by some for adoption of a "territorial" tax system, under which U.S. taxes would no longer apply to foreign-source income. Inversions can be viewed in this larger context; they have been described as "do-it-yourself" territoriality and present many of the same policy issues. This report will be updated as events in Congress and elsewhere occur.