Democrats Follow Through With Inversion Threat

Senate Democrats moved to discourage the use of inversion by outlining a proposal that would restrict the practice of earnings stripping, where U.S. companies borrow money from overseas parents and deduct the interest expense on U.S. taxes.

The plan, outlined by Sen. Chuck Schumer (D., N.Y.), makes it clear that Democrats are planning to push legislation aimed at inversion as early as September.

Corporate inversion occurs when a U.S. company purchases a foreign company and reincorporates overseas for tax purposes. The new overseas parent then lends money to its U.S. subsidiary, which is paid back with interest. Those interest payments are tax deductible, which allows the new U.S. subsidiary to pay less taxes on the revenue that remains in the U.S.

Mr. Schumer said in an interview that current IRS rules are too easily manipulated. “It now allows you by financial alchemy not to pay taxes on your U.S. profits,” he said.

Mr. Schumer’s plan would eliminate a provision that allows companies to have 1.5 times as much debt as equity while deducting all allowable interest costs and would also put other restrictions in place.

Political criticism of inversion took center stage after Walgreen Co. announced its plans to buy the part of an overseas drugstore company it didn’t already own and reincorporate overseas. While Walgreen ultimately decided against the inversion, Democratic lawmakers suggest companies with little foreign income might follow through.

“If we don’t pass this provision it won’t be just a certain type of company that asks for inversion, but every American company would because the deduction is available to all of them,” Mr. Schumer said.

Source: Hughes, Siobhan, “Democrats Push Plan to Harness Tax Inversions,” The Wall Street Journal, August 13th, 2014