- Schumer-Durbin Target Earnings Stripping
- September 22, 2014 | Author: Jonathan Goldman
- Law Firm: Sutherland Asbill & Brennan LLP - Washington Office
- The change from summer to fall did nothing to alter the focus of the Congressional tax debate - inversions. To that end, two Senators have introduced a new bill on “earnings stripping.”
Senators Charles Schumer (D-NY) and Dick Durbin (D-Ill.) introduced new legislation on September 11 that would significantly limit earnings stripping by inverted companies. The Schumer-Durbin bill follows on the heels of, and in many ways closely resembles, a discussion draft introduced by Representative Sander Levin (D-Mich.) (see our prior post on the Levin discussion draft). Unlike the Levin draft, the Schumer-Durbin legislation is specifically targeted at companies which have inverted under section 7874 of the tax code. Similar to the Levin draft, the Schumer-Durbin bill would:
Reduce the available deduction for net interest expense to 25% of adjusted taxable income, down from 50%;
- Eliminate the debt-to-equity safe harbor for earnings stripping limitations; and
- Eliminate the carry-forward of disallowed interest expense (Rep. Levin would allow for a five-year carryforward).
The new interest limitations should apply only prospectively, and it appears that an interest carry-forward from tax years prior to enactment could still potentially be deducted. The proposed legislation would also add a provision requiring pre-approval by the IRS of the terms of intercompany transactions for the 10 years following an inversion.