Dems open new front on corporate tax deals

Sen. Charles Schumer (N.Y.) on Thursday took aim at a tax break used by companies that reincorporate abroad, as Democrats ramped up their populist campaign against "corporate deserters."

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Schumer’s measure seeks to roll back a practice known as “earnings stripping,” which allows U.S. subsidiaries to take a tax deduction on interest payments after receiving a loan from their foreign parent.

The New York Democrat cast his bill as “just one piece of the puzzle,” as Democrats seek legislation to limit tax deals known as "inversions" and pound the issue on the campaign trail.

“We cannot stand idly by while corporate deserters abuse and avoid the US tax system,” Schumer, a member of the Senate Finance Committee, said in a statement.

U.S. companies are increasingly seeking inversion deals in recent years, with close to 50 in the last decade. In those kinds of deals, U.S. businesses typically buy smaller foreign competitors and then reincorporate abroad, avoiding some U.S. taxes in the process.

As Schumer has noted, those deals frequently lead to the new foreign parent giving loans to the U.S. company, allowing the American subsidiary access to the interest deduction.

Sen. Carl Levin (D-Mich.) and his brother, Rep. Sandy Levin (D-Mich.), have both introduced legislation that would effectively still count companies as American for tax purposes if they merge with a smaller, overseas counterpart.

President Obama and other Democrats have also intensified their rhetoric in recent weeks against companies that might seek to reincorporate abroad, labeling them unpatriotic. Obama has said he's examining executive actions he can take to make the deals less attractive.

But Schumer, the No. 3 Democrat in the Senate, has said for weeks that any action to curb inversions must also tackle earnings stripping as well.

Schumer’s statement Thursday left open the possibility that his new measure could be combined with other Democratic anti-inversion proposals.

Senate Finance Committee Chairman Ron Wyden (D-Ore.) has said he’s working on inversion-related legislation, and a Democratic aide on Thursday said a broader package that included Schumer’s bill could make it out of the Finance panel when Congress returns from recess in September.

But Wyden said Thursday that he was working on a “parallel” track with Sen. Orrin Hatch (Utah), the top Republican on the Finance panel, in the hopes of having bipartisan legislation in place by September.

“That includes discussion of tax and accounting rules, including addressing earnings stripping, which is a key piece of any sound solution,” said Wyden, who also noted that he appreciated Schumer’s efforts and was encouraged that lawmakers from both parties were interested in the issue.

Hatch has said he would consider a targeted measure on inversions but has also laid ground rules that underscore the divide between the GOP and Democrats on the issue. Other top Republicans, such as Ways and Means Committee Chairman Dave Camp (R-Mich.), have said that the problem should be solved through an overhaul of the tax code.

On Thursday, Schumer also pointed at a study by British banking firm Barclays that said 98 percent of Walgreen Corp.'s potential savings if it moved its address abroad would have come from earnings stripping. The pharmacy giant announced last week that it would follow through on acquiring a European competitor but remain a U.S. corporation.

Schumer’s legislation would cut in half the amount of interest — from 50 percent to 25 percent — that companies that move offshore could deduct from their U.S. taxes.

It would also require IRS approval on certain transactions between a foreign parent and U.S. company after 10 years, and seeks to limit the ability of companies to carry over the interest deduction to future years.

Updated at 2:45 p.m.