(Bloomberg) Senator Charles Schumer released a proposal today that would limit deductions available for U.S. companies that take a foreign address to reduce their taxes.

Schumer, a New York Democrat, wants to curb a practice known as “earnings stripping,” in which companies that engage in inversion transactions then load up their U.S. operations with debt and reduce their U.S. taxable income.

“We cannot stand idly by while corporate deserters abuse and avoid the U.S. tax system,” Schumer said in a statement. “This proposal is just one piece of the puzzle needed to address corporate inversions.”

Schumer’s plan may become part of a broader effort by Democratic lawmakers to curb inversions, which faces major hurdles before it can become law. Congress won’t return to Washington from a five-week summer break until Sept. 8 and members are deadlocked over legislation on the issue.

Senate Finance Committee Chairman Ron Wyden, an Oregon Democrat, said in a statement that he appreciated Schumer’s efforts. In a “parallel” process, Wyden said, he is working with the panel’s top Republican, Orrin Hatch of Utah, on a bipartisan plan.

“This issue demands a resolution in the near term and I hope to have bipartisan legislation in place come September,” Wyden said.

Deductible Limited
Schumer’s proposal would reduce the amount of deductible interest for inverted companies to 25 percent of U.S. taxable income from 50 percent. It 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.

His plan is designed as a complement to proposals from other Democrats that would make it effectively impossible for U.S. companies to take a foreign address by buying a smaller business.
Democrats have been trying to stop a wave of inversions, including pending deals by Medtronic Inc. and AbbVie Inc.

A 2007 Treasury Department study found that inverted companies routinely engage in earnings stripping.

Treasury Review
Schumer didn’t release the text of his proposed legislation or an estimate of how much revenue it would raise for the U.S. Treasury.

The Treasury Department is reviewing its authority to act on making inversions less attractive, which could include limits on earnings stripping. President Barack Obama said last week that he wants the government to act “as quickly as possible.”

Schumer’s proposal will be written to apply only to inverted companies, not all foreign-owned companies, a Schumer aide said. The administration’s efforts also are focused only on inversions, not the broader universe of companies, a senior administration official said yesterday.

Both spoke on condition of anonymity to discuss details that aren’t public.

The trouble with such limits is that it can be difficult to create a consistent definition that doesn’t affect other foreign-owned companies, said Nancy McLernon, president and chief executive officer of the Organization for International Investment. The Washington trade association advocates for foreign-based companies operating in the U.S.

Members of the group include the U.S. subsidiaries of Siemens AG and Diageo Plc, as well as companies involved in inversion transactions such as Shire Plc.

“You never legislate in a white-hot political environment,” McLernon said at a Bloomberg Government breakfast today in Washington. “There’s always going to be overreach.”

—With assistance from Lisa Lerer in Washington.

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