Clinton, aiming to curb inversion deals, looks to stop ‘earnings stripping’

(Reuters) — U.S. Democratic presidential candidate Hillary Clinton today plans to continue her push to crack down on companies that shift profits overseas, at a campaign stop in Iowa where she’s due to unveil her plan to rein in the practice, known as earnings stripping.

Clinton is spending this week detailing how she would address tax-avoiding “inversion” deals in which a company buys or merges with a foreign rival and relocates on paper to lower its U.S. tax bill. Medtronic’s $50 million acquisition of Covidien was the largest inversion deal last year, when the issue became a political football.

Clinton and her campaign have made clear they are viewing the real-life implications of inversion deals through the lens of the $160 billion plan by Pfizer to purchase smaller rival Allergan and move its headquarters to Ireland.

The deal would “leave U.S. taxpayers holding the bag,” Clinton said in a statement at the time.

Clinton has called on the U.S. Congress to stop such deals by requiring the acquiring foreign entities to control at least a 50% stake in the combined company instead of the 20% mandated under current law.

Her campaign confirmed this week that Clinton plans to suggest an “exit tax” on the untaxed earnings of corporations that use inversion deals to relocate overseas.

Clinton’s campaign said 1 of the “primary benefits” of the Pfizer-Allergan deal is earnings stripping. Today she’s slated to discuss how she believes that she would have the executive authority as president to address earnings stripping, and encourage the U.S. Treasury Dept. to use its regulatory authority to “crack down on this loophole.”

Earnings stripping is widely used and covers a range of deals that shrink the taxable U.S. profits of multinational corporations, while still allowing them to take advantage of some U.S. tax deductions.

The Treasury Dept., after a wave of inversion deals, announced new regulations in September 2014 targeting certain tax-avoidance deals. The regulations did not take on earnings stripping directly, but the department reserved the right to make any future regulation retroactive to that date.

“That was a signal to me that they thought they could do something by regulation,” Harvard Law School lecturer Stephen Shay said in an interview.

Shay said the “sentiment in the tax community today is yes there is regulatory authority to do something” about earnings stripping. Shay has written on the topic and has spoken to Clinton’s campaign in recent weeks.

Clinton’s campaign estimates that closing the “earnings stripping loophole” would raise $60 billion over 10 years that could be used to provide incentives for manufacturing, research and small business.

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