H.R. 4581: Stop Corporate Earnings Stripping Act of 2016

The Stop Corporate Earnings Stripping Act of 2016, introduced by Ways and Means Committee Ranking Member Sander Levin (D-MI) and Budget Committee Ranking Member Chris Van Hollen (D-MD), is aimed at reducing the number of corporate tax inversions by limiting the use of “earnings stripping” – a common strategy used by foreign-controlled inverted corporations to lower their U.S. taxes. Earnings stripping – a common tax avoidance strategy following an inversion – involves disproportionately leveraging a U.S. company with debt and “stripping” the U.S. tax base through deductible interest payments. The lending foreign parent (or another foreign affiliate) typically pays a reduced or zero tax rate on the interest income under an existing U.S. tax treaty. A 2007 Treasury report indicated that foreign-controlled inverted corporations aggressively engage in earnings stripping practices. The Stop Corporate Earnings Stripping Act would limit the use of earnings stripping by corporations that engage in tax-motivated inversions.

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