(Bloomberg) A proposal from a top Senate Democrat could limit deductions for companies that moved their tax addresses out of the U.S. as long ago as 1994, according to a draft obtained by Bloomberg News.

The legislative proposal, 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 maneuvers known as inversions and get added to their political strategy to blame Republicans.

The draft proposal would try to make inversions less economically attractive by applying future interest-deduction limits to companies that reincorporated abroad. Because it would apply to any inversion after April 17, 1994, the plan threatens dozens of corporations including Ingersoll-Rand Plc and Tyco International Ltd.

“It would have a very profound and immediate effect on these companies and would be very effective at reducing the attractiveness of inversions,” Robert Willens, a New York-based independent consultant on corporate taxes, said by phone Sunday. “This is certainly a political statement.”

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.

The proposal isn’t final and is subject to change, said an aide to Senator Charles Schumer of New York who spoke on condition of anonymity to discuss pending legislation. Schumer, the No. 3 leader in the chamber’s Democratic majority, hasn’t decided when he will introduce it, the aide said.

Earnings Stripping
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 and buying smaller foreign businesses, even though executives and operations wouldn’t necessarily follow.

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 mixed 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 details a proposal that Schumer outlined last month. It would reduce the amount of deductible interest for inverted companies to 25 percent of U.S. taxable income from 50 percent.

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, Willens said.

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 spoke Monday on the matter, though he did not announce a specific plan.

“I want to emphasize once again how important it is for Congress to solve this problem,” he said. “It is imperative that lawmakers get this done. Still, the administration is clear-eyed about the possibility that Congress may not move as quickly as necessary to respond to the growing wave of inversions. Given that, the Treasury Department is completing an evaluation of what we can do to make these deals less economically appealing, and we plan to make a decision in the very near future. Any action we take will have a strong legal and policy basis, but will not be a substitute for meaningful legislation—it can only address part of the economics. Only a change in the law can shut the door, and only tax reform can solve the problems in our tax code that leads to inversions.”

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

—With assistance from Zachary R. Mider in New York and Jack Kaskey in Houston.

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