*EPF311 11/13/2002
Text: Treasury to Require Information on Corporate Inversion
(Proposes also rules on other large transactions) (770)

U.S.-based corporations will be required to notify the Internal Revenue Service (IRS) and their shareholders when these companies reincorporate in foreign countries or are bought by a foreign firm, the Treasury Department has announced.

In a November 13 press release, the department said that under temporary regulations corporations that in 2002 moved their headquarters offshore in a transaction known as corporate inversion will be obliged to report to their shareholders the fair market value of any stock received by the shareholders in such transactions.

The Treasury said it also proposed rules that would require corporations to notify the IRS and their shareholders about other large transactions in which the latter may be subject to taxation.

The action is part of Treasury's attempt to address corporate inversion transactions used by U.S.-based corporations in order to minimize their tax burden. A corporate inversion occurs when a U.S.-based, multinational company legally changes places with its foreign subsidiary. As a result of such a transaction, the foreign subsidiary -- usually located in a low or zero tax country -- becomes the parent company and the U.S.-based company becomes the subsidiary.

Shareholders have an obligation to report any gains, and pay taxes on these gains, from a transaction in which they exchange stock of one corporation for stock in another corporation, according to the Treasury.

Congress has attempted to tackle corporate inversions, perceived by some as tax-avoidance issue, through legislation but so far has not passed any bill related to the problem.

Following is the text of the news release:

(begin text)

The Department of the Treasury
November 12, 2002

Treasury Issues Proposed Regulations on Inversion Transaction Reporting

Today the Treasury Department issued temporary regulations requiring corporations to notify the IRS and their shareholders when they move their headquarters offshore or are acquired by a foreign company. These regulations are part of Treasury's proposals to address corporate inversion transactions, which were unveiled by Treasury Assistant Secretary Pam Olson in testimony before the House Ways & Means Committee on June 6, 2002. Under the temporary regulations, corporations that inverted in 2002 will be required to furnish Form 1099s to their shareholders reporting the fair market value of any stock and other consideration received by the shareholders in the transaction.

The Treasury Department also issued proposed regulations that, when finalized, will require corporations to report to shareholders and the IRS other large corporate transactions in which the shareholders may be subject to tax. The proposed regulations will not apply if the information is already required to be reported under current law.

"The regulations issued today will serve to remind shareholders in taxable inversion transactions that they must report their gain from the transactions on their tax returns," stated Treasury Assistant Secretary for Tax Policy Pam Olson.

Background

On May 17, 2002, Treasury released a preliminary report on corporate inversion transactions. With respect to information reporting, the report concluded:

As an immediate matter, the information reporting rules in this area must be revisited. In this regard, many inversion transactions are taxable events at the shareholder level, with the company's U.S. shareholders required to recognize gain and pay tax thereon. However, unlike in the case of a typical disposition of stock for cash, there is no current obligation for Form 1099 reporting of the transaction to the IRS.

Requiring reporting of these transactions through Form 1099 would increase the IRS's access to information about these transactions and also would serve to remind shareholders of the tax consequences to them from the transaction the company undertook during the year and insure that the income is reported.

In testimony to the House Ways & Means Committee on June 6, 2002, Treasury Assistant Secretary for Tax Policy Pam Olson stated:

Reporting Requirements: In many inversion transactions the company's shareholders are required to recognize gain. Current Treasury regulations generally require Form 1099 reporting to the IRS of the gross proceeds from any sale for cash effected by a broker in the ordinary course of its business. However, there are no similar reporting obligations in the case of an inversion where a shareholder exchanges stock of one corporation for stock in another corporation. We intend to establish a Form 1099 reporting requirement for stock transfers in inversions and other taxable reorganization transactions. Requiring reporting of these transactions will increase the IRS's access to information about the transactions. It also will serve to remind shareholders of the tax consequences to them from the company's transaction and of their obligation to report any gain.

The texts of the temporary and proposed regulations are available on the Internet at http://www.treas.gov/press/releases/reports/proposedreg.pdf and http://www.treas.gov/press/releases/reports/temporaryreg.pdf. They will be published in the Federal Register in the next few days and are subject to minor technical changes.

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(Distributed by the Office of International Information Programs, U.S. Department of State. Web site: http://usinfo.state.gov)

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