• Democrats Unveil Legislation to Prevent Tax Inversions
  • September 15, 2014
  • Law Firm: McDonald Hopkins LLC - Cleveland Office
  • This week, two of the Senate's top Democrats introduced legislation that would deter the surge in U.S. overseas inversion deals by deterring a practice known as earnings stripping.  One of the main incentives driving a surge in U.S. corporations' tax-driven overseas inversion deals would be pared back under a plan unveiled on Wednesday by two top Senate Democrats.

    Earnings stripping is the process by which U.S. companies avoid paying U.S. taxes by shifting their U.S. profits to jurisdictions with lower tax rates - like Canada.

    The Schumer-Durbin bill came as at least nine U.S. companies were in the final stages of inversions, which involve buying a smaller foreign company in a lower-tax country and then reincorporating the combined operation there.

    Schumer and Durbin said they would work with top Senate tax-writers to include their proposal in a package of reforms aimed at inversions, which they said could help push Congress toward enacting broader corporate tax legislation.

    Their proposal would reduce the amount of interest deductions a company can claim to 25 percent from 50 percent of income, even for companies that inverted years ago. It also would eliminate a rule that lets less-leveraged companies avoid interest deduction limits.

    Currently, companies that cannot use a tax deduction because they have hit the annual limit may apply the benefit the next year. The Schumer-Durbin bill would eliminate that as well.

    Republicans have criticized Democratic inversion proposals as election-year gimmicks and said lawmakers should instead focus on lowering corporate tax rates.