House Dems move to stem flow of US business headquarters overseas

House Dems move to stem flow of US business headquarters overseas
© Michael Bonfigli/The Christian Science Monitor

Two top House Democrats introduced legislation Tuesday afternoon to limit one of the main tax benefits for U.S. companies that reincorporate in foreign countries.

The bill, from House Ways and Means Committee ranking member Sandy Levin (D-Mich.) and House Budget Committee ranking member Chris Van Hollen (D-Md.), would clamp down on a tax-avoidance strategy known as earnings stripping.

Their legislation is the latest effort aimed at deterring corporate inversions, or transactions in which American companies merge with foreign companies and then reincorporate the merged companies in foreign countries. It comes one day before the Ways and Means Committee holds a hearing on international tax reform.

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After an inversion, the now-foreign-controlled companies will often engage in earnings stripping. This is when the foreign parent lends money to the U.S. affiliate and the American subsidiary gets a tax deduction for interest payments made to the foreign entity.

The bill from Levin and Van Hollen would reduce the amount of the interest deduction that companies can claim to 25 percent of taxable income. The legislation would apply to companies that invert on or after May 8, 2014.

“We cannot continue to allow companies to shift their tax obligations onto American workers and families simply by changing their mailing address,” Van Hollen said in a statement. “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.”

The Treasury Department has issued two rounds of guidance aimed at slowing the pace of inversions and is looking into taking further action, including on earnings stripping. But Treasury Secretary Jack LewJacob (Jack) Joseph LewLobbying World Russian sanctions will boomerang Obama talks up Warren behind closed doors to wealthy donors MORE said that only congressional action can stop inversions.

Levin and other Democrats have previously introduced a bill that would prohibit inversions for tax purposes unless shareholders of the foreign company own most of the merged company. 

--This report was updated at 3:12 p.m.