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US Anti-Inversion Bill May Tackle Earnings Stripping

by Mike Godfrey, Tax-News.com, Washington Tuesday, August 19, 2014

While United States Senate Finance Committee Chairman Ron Wyden (D – Oregon) has indicated that he is working to produce, by next month, a bipartisan proposal to discourage corporate inversions, some lawmakers have urged that the proposal should include measures to challenge "earnings stripping."

In a statement issued on August 14, Wyden said he is "encouraged that colleagues from both sides of the aisle are offering ideas on a solution."

He said: "It's important to define key principles now as we push forward to finally close this loophole." He disclosed that he is negotiating with Orrin Hatch (R– Utah), the Finance Committee Ranking Member, "to put a bipartisan, Committee lens to the issue."

While leaving the door open for further discussions, Hatch recently expressed the view that the short-term fixes that have so far been proposed by the Democratic Party are "punitive." Proposals have included an increase to the minimum foreign shareholding cap (from 20 percent to 50 percent). This would require that a foreign company's shareholders hold at least 50 percent of the shares in the US company after a merger in order to move away from the US corporate tax rate.

New proposals, which seek to tackle "earnings stripping," would restrict the ability of an inverted company to use inter-group loans to allocate debt to the US subsidiary after inversion to further reduce tax liability in the US. This could be achieved by amending rules governing the deduction of interest expenses, Senator Charles Schumer (D – New York) has proposed.

Wyden has confirmed that he had discussed earnings stripping with Schumer, who is also a member of the Finance Committee. Wyden said talks have been held on "tax and accounting rules, including earnings stripping," which, Wyden opined, should be "a key piece of any sound solution."

Schumer's proposal would revisit the thin capitalization rule that allows companies to have 1.5 times as much debt as equity; reduce the permitted amount of deductible interest for inverted companies to 25 percent of US taxable income from 50 percent; impose restrictions on companies' ability to carry forward interest deductions; and require the US subsidiary to obtain annual pre-approval from the Internal Revenue Service (IRS) for related-party transactions for ten years after an inversion.

One problem that is being seen in drafting anti-inversion legislation is the difficulty in distinguishing between inverted companies now owned by foreign companies, and those that have similar characteristics, but are actually "normal" US subsidiaries of foreign multinationals. The Organization for International Investment has recently warned that the current anti-inversion proposals "threaten to inadvertently impact all American subsidiaries of foreign multinationals and make the country less attractive for future foreign direct investment."

There are also concerns that the prospect of legislation being proposed next month may delay any plan for immediate administrative action being considered by the US Administration, as the Treasury might not want – by its measures – to prejudice any future package proposed in Congress.

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