Levin, Van Hollen Introduce Earnings Stripping Legislation to Limit Tax Inversions

Feb 23, 2016

WASHINGTON, DC – Ways and Means Committee Ranking Member Sander Levin (D-MI) and Budget Committee Ranking Member Chris Van Hollen (D-MD) today introduced legislation aimed at reducing the number of corporate tax inversions by limiting the use of “earnings stripping” – a common strategy used by foreign-controlled inverted corporations to lower their U.S. taxes.

“Republicans have failed to take action on stopping corporate tax inversions, choosing instead to stand on the sidelines and watch one American company after another move their corporate headquarters overseas,” said Rep. Levin. “After inverting, many of these companies engage in earnings stripping, a practice that enables them to significantly lower the amount of taxes they pay in the U.S, while taking advantage of our country’s resources and strong workforce. While Republicans sit on their hands, House Democrats will continue to take actions to aggressively limit tax-motivated inversions.”

“American taxpayers are on the hook for billions of dollars in corporate tax obligations because Congress has failed to close the egregious inversion loophole,” said Rep. Van Hollen. “We cannot continue to allow companies to shift their tax obligations onto American workers and families simply by changing their mailing address. Putting an end to earnings stripping by inverted companies is an important step toward ensuring these companies aren’t reaping taxpayer-funded benefits while failing to pay their fair share.”

Earnings stripping – a common tax avoidance strategy following an inversion – involves disproportionately leveraging a U.S. company with debt and “stripping” the U.S. tax base through deductible interest payments. The lending foreign parent (or another foreign affiliate) typically pays a reduced or zero tax rate on the interest income under an existing U.S. tax treaty. A 2007 Treasury report indicated that foreign-controlled inverted corporations aggressively engage in earnings stripping practices. The Stop Corporate Earnings Stripping Act would limit the use of earnings stripping by corporations that engage in tax-motivated inversions.

Click here for a summary of the Stop Corporate Earnings Stripping Act of 2016. Find a PDF of the text of the legislation here .

BACKGROUND

Rep. Levin and other House Democrats previously introduced legislation – the Stop Corporate Inversions Act ( H.R. 4679 in 2014, H.R. 415 in 2015) – to amend Section 7874 of the tax code in order to tighten restrictions on inversions. The  Joint Committee on Taxation estimates that the legislation would save the U.S. tax base nearly $41 billion over 10 years.

The Stop Corporate Earnings Stripping Act of 2016 (H.R. 4581) is an additional measure designed to further deter corporate inversions. The Stop Corporate Inversions Act and the Stop Corporate Earnings Stripping Act would apply to inversions completed after May 8, 2014.

The U.S. Department of Treasury released notices in September and November of 2015 aimed at making tax inversions less beneficial and more difficult for American companies to undertake.

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