WASHINGTON Two leading House Democrats introduced legislation on Tuesday intended to curb corporate tax inversion deals by preventing companies from lowering the effective tax rates of U.S. business operations after moving their headquarters overseas.
A bill, authored by the top Democrats on the House Ways and Means and Budget Committees, would limit the ability of newly inverted companies to engage in a tax strategy called “earnings stripping,” which the lawmakers said often follows an inversion deal.
Corporate inversions, an issue for anti-establishment voters in this year’s presidential and congressional election campaigns, typically occur when a U.S. company buys a foreign firm and then relocates its headquarters to the foreign company’s home country, if only on paper, in a bid to reduce overall taxes.
The Obama administration has taken policy steps to discourage such deals. But only Congress can eliminate the option through tax reform, a prospect unlikely until after the Nov. 8 election.
“We cannot continue to allow companies to shift their tax obligations onto American workers and families simply by changing their mailing address,” said Representative Chris Van Hollen of Maryland, senior Democrat on the House Budget Committee.
Van Hollen introduced the “Stop Corporate Earnings Stripping Act of 2016” with Representative Sander Levin of Michigan, the senior Democrat on the House Ways and Means Committee.
The lawmakers said newly inverted companies have stripped their U.S. operations of taxable earnings by loading them with debt that produces tax-deductible interest payments. The payments are made to the new foreign parent or another foreign affiliate as interest income that often pays a reduced or zero tax rate.
The new legislation would reduce or eliminate financial thresholds that allow companies to pursue the earnings-stripping strategy after inversion.
(Reporting by David Morgan; Editing by Alistair Bell)