Two ranking US Democrats today introduced a tax bill designed to lessen the attractiveness of corporate inversions by limiting companies’ ability to interest strip after an inversion.
The bill was introduced by House Ways and Means Committee Ranking Member Sander Levin (D-MI) and Budget Committee Ranking Member Chris Van Hollen (D-MD).
“After inverting, many of these companies engage in earnings stripping, a practice that enables them to significantly lower the amount of taxes they pay in the US, while taking advantage of our country’s resources and strong workforce,” Levin explained.
Current rules disallow deductions for interest payments by a US entity to a related party that are exempt from US withholding tax when the entity’s debt-to-equity ratio exceeds 1.5 and its net interest expense exceeds 50 percent of its adjusted taxable income.
The bill would repeal the debt-to-equity threshold for inversions occurring on or after May 8, 2014, where the historical shareholders of the US entity own more than 50 percent but less than 80 percent of the new foreign parent entity following the inversion.
Further, for such inversions, the bill would disallow deductions for interest payments when the US entity’s net interest expense exceeds 25 percent of the entity’s adjusted taxable income, rather than 50 percent.
The bill would also repeal the excess limitation carryforward and permit disallowed interest expense to be carried forward for only five years, rather than indefinitely as under current law.
“We cannot continue to allow companies to shift their tax obligations onto American workers and families simply by changing their mailing address. Putting an end to earnings stripping by inverted companies is an important step toward ensuring these companies aren’t reaping taxpayer-funded benefits while failing to pay their fair share,” Van Hollen said.
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