House Democrats are opening a new front in their war against U.S. companies cutting their tax bills by moving overseas.
On Tuesday, the ranking Democrats on the House Budget and Ways and Means committees introduced legislation that would undercut one of the main benefits of so-called corporate inversions, in which U.S. firms merge with companies in low-tax jurisdictions and then move their headquarters there.
Reps. Chris Van Hollen of Maryland and Sander Levin of Michigan introduced a bill that would prevent U.S.-based companies from lowering the taxes they owe to the Treasury by issuing debt to parent companies overseas. Doing so lowers U.S. taxes, because interest payments on the debt is deductible, while shifting profits to the jurisdiction with the lower tax rate.
Levin said the practice allows companies “to significantly lower the amount of taxes they pay in the U.S, while taking advantage of our country’s resources and strong workforce. While Republicans sit on their hands, House Democrats will continue to take actions to aggressively limit tax-motivated inversions.”
Earnings-stripping, as the practice is called, is thought by many analysts to be a major factor behind the recent rash of inversions.
The legislation is not likely to advance in the GOP-controlled House. Republicans have dismissed efforts to prevent inversions in favor of broader tax reform to make the U.S. more attractive to companies in the first place. The U.S.’s 35-percent corporate tax rate is the highest among developed countries.
“I don’t like these targeted approaches,” Rep. Charles Boustany, R-La., said Tuesday at an event in downtown Washington, D.C. Boustany is chairman of the subcommittee responsible for tax policy and is involved in a Republican effort to draft international tax legislation.
Nevertheless, the Van Hollen-Levin measure might serve as a guide to the kind of policy Democrats would implement if they had leverage in setting the debate.
It would curb earnings-stripping by limiting the amount of debt that businesses could issue. The measure would add to existing Democratic proposals to tighten the statutory barriers to companies undergoing inversions.
President Obama’s Treasury Department has twice taken administrative action to address inversions through rule-making, most recently in November. Then, the Treasury said that it was weighing issuing rules to prevent earnings-stripping.
