Sens. Schumer and Durbin Release Text of Corporate Inverters Earnings Stripping Reform Act of 2014

Today, Sens. Chuck Schumer (D-NY) and Richard Durbin (D-IL) released the final text of “Corporate Inverters Earnings Stripping Reform Act of 2014”. The bill is designed to “prevent earnings stripping of domestic corporations, which are members of a worldwide group of corporations which includes an inverted corporation,” while requiring “agreements with respect to certain related party transactions with those members.”

In a release, Sens. Durbin and Schumer noted that it is “the first Senate Democratic proposal to address the practice of earnings stripping by companies that move their domicile overseas and will work in harmony with Finance Chairman Wyden and Senator Levin’s efforts to put together a comprehensive package of legislative proposals to address corporate inversions,” adding “proposals to address the recent wave of corporate inversions must also be used as a bridge to comprehensive corporate tax reform.”
 
Key points from the legislation (as excerpted from the Senators’ release) include:

• Repeal the debt-to-equity safe harbor so that limitations on the interest expense deduction will apply to all inverters, regardless of their financial leverage;
• Reduce the permitted net interest expense to no more than 25 percent (down from 50 percent) of the subsidiary’s adjusted taxable income;
• Repeal the interest expense deduction carryforward and excess limitation carryforward so that inverters cannot take advantage of the deduction in future years; and
• Require the U.S. subsidiary to obtain IRS preapproval annually on the terms of their related-party transactions for 10 years immediately following an inversion.