• Representative Levin Targets Earnings Stripping
  • August 12, 2014
  • Law Firm: Sutherland Asbill Brennan LLP - Washington Office
  • Inversion transactions are making waves, and politicians are taking notice, with the number of legislative proposals dealing with inversions and other international tax issues growing at a fast rate.

    Of particular note, Representative Sander Levin (D-Mich.), the ranking member of the House Ways and Means Committee, released a discussion draft of the Stop Corporate Earnings Stripping Act of 2014 on August 1.  Among other changes, the discussion draft would tighten the so-called “earnings stripping” provisions of section 163(j) of the Internal Revenue Code by:

    • Reducing a U.S. company’s permitted net interest expense to no more than 25% of the company’s adjusted taxable income;
    • Eliminating the 1.5-to-1 debt-to-equity safe harbor;
    • Reducing the carryforward period for disallowed interest expense to five years; and
    • Repealing the excess limitation carryforward.

    Although Rep. Levin’s bill has been introduced at a time in which inversions are a hot topic in tax policy circles, the Stop Corporate Earnings Stripping Act of 2014 is not targeted exclusively at U.S. companies that have completed inversion transactions.  Rather, the discussion draft’s proposed changes seemingly would affect the U.S. affiliates of any foreign-based multi-national company.

    Rep. Levin’s discussion draft is not the only game in town, and it is not limited to the earnings stripping rules, as it also proposes changes to certain rules applicable to controlled foreign corporations (specifically, the investment in U.S. property rules under section 956 of the Internal Revenue Code and some yet to be determined mechanism to prevent such corporations from being “de-controlled”).  Given the current state of affairs, we expect that even more legislative proposals will come from Congress targeting inversion transactions.  In addition, the Obama administration recently told The New York Times that it may take executive actions to curb inversion transactions.

    Several other recent legislative proposals targeting inversion transactions are summarized below.

    • Rep. Levin, along with his brother Senator Carl Levin (D-Mich.), introduced the Stop Corporate Inversions Act of 2014 on May 20.  Among other changes, this bill would reduce the post-inversion ownership threshold from 80% to more than 50%, and also add an alternative management and control test, for treating the foreign acquiring corporation as a domestic corporation for U.S. federal tax purposes.  For more on this bill, which would target inversion transactions completed after May 8, 2014, see our prior post.
    • Senator Dick Durbin (D-Ill.) and Rep. Rosa DeLauro (D-Conn.) introduced the No Federal Contracts for Corporate Deserters Act of 2014 on July 29.  This bill generally would bar federal contracts for companies that had taken part in an inversion transaction, applying a more than 50% ownership threshold or, alternatively, a management and control test, for purposes of identifying “inverted domestic corporations.”