WASHINGTON, D.C. – U.S. Sens. Sherrod Brown (D-OH) and Charles E. Schumer (D-NY) – members of the U.S. Senate Committee on Finance’s International Tax Reform Working Group – this week offered a pair of bills to make sure multinational corporations pay their fair share of U.S. taxes.

  • The “Pay What You Owe Before You Go” Act would require corporations who want to shift their headquarters overseas for tax purposes to pay their full U.S. tax bill on all deferred overseas profits before reincorporating in a new country.
  • The “Corporate Inverters Earnings Stripping Reform” Act would limit inverted companies’ ability to strip future U.S. earnings out of the country tax-free through excessive use of the interest expense deduction.   

“Everyone knows that before you leave a restaurant you have to settle your bill – corporations shouldn’t get to play by different rules. This bill says if corporations want to move their corporate headquarters overseas, they have to pay what they owe before they go,” Brown said. “So-called inversions are a scam and they have to stop. People on both sides of the aisle acknowledge that our international corporate tax system is broken. The long-term solution is bipartisan international corporate tax reform. But until we get there, this is a commonsense step that will increase investment here at home, and ensure a level playing field for all American companies.”

“Earnings stripping is a primary driver of the current wave of inversions and we need to shut it down,” said Schumer. “My bill curtails the incentive for companies to use shady accounting gimmicks to avoid paying their U.S. tax obligations after they invert. Coupled with Senator Brown’s proposal, we want to make clear that inverting corporations will no longer be able to avoid playing by the rules. They will pay their tax bills owed before they leave America and they will continue paying taxes on their future business activity within our country. While I will continue working to forge consensus on comprehensive international tax reform, we can’t wait to take timely and common-sense steps to immediately put a stop to this egregious practice.”

The tax code allows corporations to defer paying U.S. tax on their foreign profits until they return those profits to the U.S. In order to get access to these profits without paying the U.S. tax bill, a number of corporations are shifting their headquarters overseas for tax purposes through a merger with a smaller corporation in what is called an “inversion.”

The Pay What You Owe Before You Go Act of 2016 would address inversions by requiring companies to pay their full U.S. tax bill on all deferred overseas profits before reincorporating in a new country. The legislation levies a 35 percent exit tax with credits for foreign taxes paid against the overseas profits of corporations seeking to invert as defined by Section 7874 of the Internal Revenue Code.

At the same time, once a corporation has successfully inverted, they load their remaining U.S. subsidiary up with excessive debt that is “owed” to the foreign headquarters so they can deduct interest payments on this debt, further allowing the company to avoid paying U.S. taxes. 

The Corporate Inverters Earnings Stripping Reform Act would address the practice of earnings stripping by inverted companies in two ways:  First, it will serve as a deterrent for those considering an inversion, as they will no longer see the opportunity to avoid U.S. taxation post-inversion.  Second, it will ensure the earliest inverters do not have a competitive advantage over their U.S. counterparts, applying the new rule to their future related party transactions, as well. Specifically, the legislation will:

  • Repeal the debt to equity safe harbor so that limitations on the interest expense deduction will apply to all inverters, regardless of their financial leverage;
  • Reduce the permitted net interest expense to no more than 25 percent (down from 50 percent) of the subsidiary’s adjusted taxable income;
  • Repeal the interest expense deduction carryforward and excess limitation carryforward so that inverters cannot take advantage of the deduction in future years; and
  • Require the U.S. subsidiary to obtain Internal Revenue Service (IRS) preapproval annually on the terms of their related party transactions for 10 years immediately following an inversion.

The legislation is cosponsored by U.S. Sens. Dick Durbin (D-IL), Brown, Ben Cardin (D-MD), Bill Nelson (D-FL), Debbie Stabenow (D-MI), Robert Menendez (D-NJ), and Elizabeth Warren (D-MA).

 

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