Today, Sen. Charles Schumer (D-NY) introduced a bill to combat the recent slew of inversions, i.e. companies re-domiciling abroad to escape the U.S.’s anti-competitive tax system. Sadly, Schumer’s bill is a purely political messaging piece. While making inversions less advantageous, it is not likely to stop inversions since it in no way addresses the underlying causes of companies inverting, i.e. the U.S.’s sky high 35% tax rate and its antiquated and atypical double taxation of monies earned overseas.
Instead, in an exercise of vast overreach, Schumer aims to limit the ability of certain firms that have re-domiciled to move taxable profits among the firm’s various subsidiaries via intra-company loans, aka “earnings stripping.” This legislation would penalize any company that ever has entered into a combination transaction where the shareholders of the U.S. company received more than 50% of the stock of the foreign parent company.
For impacted companies, this bill prospectively would punitively deny these companies the ability to allocate certain interest expense as well as require approval of certain intra-company transactions annually by the IRS for a 10 year period after inverting.
This proposal is overly complex, raises little new revenue, is contrary to decades of tax law, potentially violates the non-discrimination clause of existing tax treaties, and would likely harm employment growth and international investment in the US.
When a similar proposal to limit earnings stripping was floated in the administration’s 2014 budget, it was estimated to raise an average of $270 million per year over 10 years. If earnings stripping were truly a major problem and if this proposal was truly combatting the root cause of inversions, then it would certainly be expected to raise significantly more revenue.
The reality is that Schumer’s bill is nothing more than political demagoguery in the final legislative days leading up to the elections. If Schumer wanted to make the United States an attractive place for both domestic and foreign companies to do business, invest, and create jobs – and in the process nip the inversion wave in the bud -- he would stop wasting time on this kind of polarizing political rhetoric and would instead work seriously to undertake comprehensive tax reform that lowers rates for all taxpayers and shifts to an internationally competitive tax system.
Read a few of our previous posts on inversions here, here and here.