Top U.S. Senate Democrats unveil earnings stripping plan

By Emily Stephenson

WASHINGTON, Sept 10 (Reuters) - One of the main incentives driving a surge in U.S. corporations' tax-driven overseas inversion deals would be pared back under a plan unveiled on Wednesday by two top Senate Democrats.

Though the plan was seen by analysts as unlikely to become law anytime soon, it draws further attention to the rising number of U.S. businesses moving abroad for tax reasons.

Dick Durbin and Chuck Schumer, the No. 2 and No. 3 Democrats in the U.S. Senate, said their plan would deter a practice known as earnings stripping, in which companies avoid U.S. taxes by shifting U.S. profits to jurisdictions with lower tax rates.

"This bill curtails the incentive for companies to use shady accounting gimmicks to avoid paying their U.S. tax obligations," Schumer said in a statement.

The Schumer-Durbin bill came as at least nine U.S. companies were in the final stages of inversions, which involve buying a smaller foreign company in a lower-tax country and then reincorporating the combined operation there.

Schumer and Durbin said they would work with top Senate tax-writers to include their proposal in a package of reforms aimed at inversions, which they said could help push Congress toward enacting broader corporate tax legislation.

Democrats have floated a series of proposals to fight inversions, which are causing concern about erosion of the U.S. corporate tax base among Washington policymakers.

Among companies in the midst of inverting are medical device maker Medtronic Inc (NYSE: MDT - news) , fast food chain Burger King Worldwide Inc, and drug companies AbbVie Inc (NYSE: ABBV - news) , Mylan Inc (NasdaqGS: MYL - news) and Salix Pharmaceuticals Ltd (NasdaqGS: SLXP - news) .

Democrats have called such moves "unpatriotic," and hope to emphasize the issue in the November mid-term elections.

One way inverted companies reduce taxes is through earnings stripping. Typically, this is when a foreign parent company lends money to its U.S. unit, which then sends U.S. profits back as interest payments. These payments are partially tax-deductible in the United States and often tax-free abroad.

If retailer Walgreen Co (NYSE: WAG - news) had inverted as planned as part of a deal with European drug store chain Alliance Boots Holdings Ltd, about 98 percent of its savings would have come from earnings stripping, Schumer and Durbin said.

Their proposal would reduce the amount of interest deductions a company can claim to 25 percent from 50 percent of income, even for companies that inverted years ago. It also would eliminate a rule that lets less-leveraged companies avoid interest deduction limits.

Currently, companies that cannot use a tax deduction because they have hit the annual limit may apply the benefit the next year. The Schumer-Durbin bill would eliminate that as well.

Republicans have criticized Democratic inversion proposals as election-year gimmicks and said lawmakers should instead focus on lowering corporate tax rates. (Reporting by Emily Stephenson; Editing by Kevin Drawbaugh, G Crosse)