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Further US Democrat Bills Take Aim At Tax Inversions

by Mike Godfrey, Tax-News.com, Washington

10 November 2015


Spurred by reports of talks between Pfizer Inc and Allergan Plc, Mark Pocan (D – Wisconsin) has introduced two bills into the House of Representatives to discourage US multinational companies from undertaking corporate tax inversions.

Tax inversion techniques have been used by some US multinationals to move their tax residences abroad – away from the high 35 percent US headline federal corporate tax rate – and to unlock unrepatriated earnings held offshore, even if their management and operations remain in the United States.

Pocan said: "This legislation will eliminate a major incentive for corporations to leave the United States and ensure that companies pay their taxes on overseas profits immediately."

The Putting America First Corporate Tax Act would cancel the provision in the current US tax code that allows corporations to defer paying corporate tax on foreign profits until that money is repatriated back to the US. It would require corporations to pay US taxes on all future domestic and foreign active income beginning from December 31, 2014.

The intention of Pocan's second Bill, the Corporate Fair Share Tax Act, is to curb the practice of "earnings stripping" whereby domestic subsidiaries borrow from their new foreign parent company to increase their interest payments and reduce their US taxable income. Specifically, the legislation limits the US tax deductions a corporation may claim to a level at which the US entity's share of interest on debt is proportionate to the US entity's share of a financial reporting group's earnings.

Rocan's proposed legislation takes a different approach to the Stop Corporate Inversions Act, which was introduced by other Democrat lawmakers earlier this year. That Bill would change the current law, under which a company that merges with an offshore counterpart can move its residence abroad so long as at least 20 percent of its shares are held by the foreign company's shareholders after the merger. It would restrict corporate inversions by putting the minimum foreign shareholding cap at 50 percent.

However, all of the bills appear to have little chance of progressing through Congress at the present time, as there remains a political divide about the right course of action to tackle inversions. Other leading Democrat and Republican lawmakers appear to have decided that tax reform, to cut the corporate tax rate and change the way the US taxes foreign earnings, will be the only real long-term solution for halting inversions.

TAGS: compliance | tax | business | tax compliance | law | corporation tax | multinationals | legislation | transfer pricing | United States | tax breaks | tax reform | Tax

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