Senators Schumer And Durbin Introduce Legislation To Curb Corporation Inversion Transactions By Focusing On Earnings Stripping Rules: Treasury Also Will Enter Into The Fray In Issuing Anti-Inversion Regulations Under Section 385

There have reported to have been approximately 15 major inversion transactions engaged in by U.S. multinationals this year, including most recently Burger King's foray into foreign "statehood". This adds to the exodus of U.S. based companies which have previously engaged in an inversion transaction and already have a new foreign parent corporation while retaining 60% or more of its shareholder base intact. This effectively limits post-inversion U.S. taxation to U.S. source income and eliminates application of the CFC rules. Where the foreign corporation does not have substantial business activities in its jurisdiction of formation and the retained ownership percentage is 80% or more, then the foreign corporation is required to be disregarded under Section 7874(b). Where a U.S. corporation inverts at the 60% or more but less than 80% standard or test, then such arrangement may yield further tax benefits than simply limiting U.S. taxes on income to only U.S. source income, through having the foreign parent corporation loan funds back to the U.S. based subsidiary with interest payments being deductible in computing the U.S. tax. In contrast, where a U.S. parent corporation borrows funds from a foreign based controlled foreign corporation, the transaction can be treated as a distribution of a dividend from the CFC's earnings and profits under Section 956.

Schumer-Durbin Legislation

In a press release issued on September 10, Senators Charles E. Schumer (D-NY) and Richard Durbin (D-IL) published their proposed bill specifically targeting the practice of earnings stripping which is frequently a sport engaged in after the inversion transaction is closed. According to Senator Schumer's press release: "In earnings stripping, one of the most egregious practices of corporate inversions, inverted companies load their U.S. subsidiary up with excessive debt that is "owed" to the foreign headquarters so they can deduct interest payments on this debt, further allowing the company to avoid paying U.S. taxes." The Schumer-Durbin legislation is the first Senate Democratic proposal to address the practice of earnings stripping by companies that move their domicile overseas and will work with Senate Finance Chairman Wyden and Senator Levin's efforts to put together a comprehensive package of legislative proposals to address corporate inversions. The Senators also noted that proposals to address the recent wave of corporate inversions must also be used as a bridge to comprehensive corporate tax reform. "Earnings stripping is the number...