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.