Schumer Anti-Inversion Tax Plan Could Reach Back to 1994

A top Senate Democrat’s proposal to limit future deductions for companies that moved tax addresses out of the U.S. as many as 20 years ago would penalize dozens of so-called inversion deals.

The proposal by Charles Schumer of New York, the No. 3 leader in the Senate’s Democratic majority, would reduce the amount of deductible interest for inverted companies to 25 percent of U.S. taxable income from 50 percent, according to a draft obtained by Bloomberg News.

President Barack Obama has included a similar provision in his annual budgets, and this is the first time the language made it into a legislative proposal, Robert Willens, a New York-based independent consultant on corporate taxes, said by phone yesterday.

“It would have a very profound and immediate effect on these companies and would be very effective at reducing the attractiveness of inversions,” Willens said. “This is certainly a political statement.”

Schumer’s plan, which faces high hurdles in a deadlocked Congress, may become part of Democrats’ attempts to penalize companies that cut their tax bills with cross-border mergers and get added to their political strategy to blame Republicans.

The proposal isn’t final and is subject to change, said a Schumer aide who asked not to be named while discussing pending legislation. Schumer hasn’t decided when he will introduce it, the aide said.

Several U.S.-based companies, including Medtronic Inc. and AbbVie Inc., have pending deals that would let them cut their corporate tax rates by moving their tax home outside the country by buying smaller foreign businesses, even though executives and operations wouldn’t necessarily follow.

Earnings Stripping

Because it would apply to any inversion after April 17, 1994, the plan threatens corporations including Ingersoll-Rand Plc and Tyco International Ltd. Establishing the 1994 date would appear to allow just two inverted companies to escape the bill’s reach because of how long ago they changed their address: Helen of Troy Ltd. and McDermott International Inc.

Schumer’s bill addresses the practice known as earnings stripping, the post-inversion steps that companies take to reduce U.S. taxes on U.S. income, often by loading up interest deductions in the U.S.

A 2007 Treasury Department study found that inverted companies engage in earnings stripping, even amid a lack of evidence that foreign-owned businesses as a whole engage in the practice.

“Earnings stripping is by far the most prominent and widely used strategy used to shift income out of the U.S. to cut U.S. taxes,” Willens said.

Interest Deduction

The draft also would require such companies to obtain approval from the Internal Revenue Service for transactions between different parts of the same company for 10 years.

Schumer also proposes restrictions on companies’ ability to carry deductions forward to future years.

Among the trickiest parts of writing the legislation is defining the list of businesses to which the tougher rules would apply, so that it is targeted toward inverted companies without affecting others.

Because of the deadlock in Congress, the administration is considering executive actions that would make inversions less attractive. Treasury Secretary Jacob J. Lew will speak today on the matter, though he isn’t expected to announce a specific plan.

Republicans have resisted a quick crackdown on inversions, arguing a broader revamp of the tax code should take priority.