Schumer Bill Attacks Inversions, Earnings Stripping

Dave Johnson

New York Democratic Senator Chuck Schumer has introduced a bill aimed at fighting the corporate tax-dodging practices of “inversion” and “earnings stripping,” which involve use of non-US affiliate companies. The bill would also apply to companies that have already inverted.

Inversion is the technical name for what happens when a company buys a non-US company, and then pretends the resulting company is no longer US-based. Earnings stripping is the practice of using a non-US affiliate (after the inversion) to loan money to a US affiliate, thereby loading them up with debt. This “strips” taxable income from the US company, which deducts the interest paid on those loans from US taxes. In the case of a company that inverted while already holding cash outside of the country from “deferral,” the deferred income is loaned to the US company to strip earnings — effectively stripping the profits twice.

To fight earnings stripping Schumer’s bill would reduce the amount of interest that can be deducted by inverted companies, from 50 percent of taxable income to 25 percent. Bloomberg News notes that the earnings stripping action in this bill could “reach back” to 1994: “A top Senate Democrat’s proposal to limit future deductions for companies that moved tax addresses out of the U.S. as many as 20 years ago would penalize dozens of so-called inversion deals.”

The Hill quotes Schumer on his bill:

“This bill curtails the incentive for companies to use shady accounting gimmicks to avoid paying their U.S. tax obligations. The only way to solve this problem for good is passing legislation, and our preference is to work with our Republican colleagues to pass a strong bill.”

Obstruction

The Wall Street Journal notes that the bill will most likely be obstructed (by Republicans):

The plan—like similar ones before it—is likely to get a chilly reception in Congress. The Obama administration, for example, has proposed to do many of the same things in its budgets over the years. The Bush administration before it also advanced a similar proposal on limit earnings stripping.

But lawmakers have never gotten around to enacting any of the new curbs on inversions, for a variety of reasons.

Republicans in Congress have generally raised concerns about backward-looking solutions; many of the legislative proposals would apply to companies that inverted years ago, not just companies that are considering it now. GOP lawmakers generally prefer a comprehensive rewrite of the tax system, to make the U.S. more attractive to businesses.

Marketwatch reports that Schumer believes that a deal can be made on inversions in the “lame duck” session of Congress that follows the election.

Sen. Charles Schumer sees an opening for a deal to limit corporate tax “inversions” after Congress comes back from the November elections, he told MarketWatch on Wednesday.

“I think we have a chance to get some kind of compromise not in the next two weeks, but in the lame duck session,” the New York Democrat said in a phone interview.

Right. Like Republicans are going to make corporations pay their taxes. What’s the movie with the famous line,”And monkeys might fly out of my butt”?

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