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Draft U.S. tax inversion plan would target earnings stripping

WASHINGTON (Reuters) – The No. 3 U.S. Senate Democrat has circulated a draft proposal to crack down on U.S. companies that invert, or merge with foreign competitors to get lower tax rates, and it would apply to deals as far back as 1994.

The plan developed by Senator Chuck Schumer of New York would reduce the incentives for companies to invert, according to a draft document that Reuters viewed.

Schumer’s plan, which he has not formally introduced and which could still change, would curb the use of a strategy used by inverted companies and known as earnings stripping.

In earnings stripping, a company’s foreign headquarters piles debt on the U.S. subsidiary, which then can pay back income earned in the United States as interest on the debt and claim tax deductions.

Bloomberg first reported on the draft bill.

Democrats are weighing a number of options to prevent inversions, which they say are unpatriotic and deprive the United States of tax dollars. The companies say higher U.S. corporate tax rates, especially for income earned overseas, makes it difficult for them to remain in the United States.

There have been a number of inversion deals in recent years, most recently when Burger King Worldwide Inc announced it would merge with Canada’s Tim Hortons Inc.

Senate Democrats have proposed other methods to attack inversions, but it is unclear whether any of them will move forward in the current, bitterly divided Congress. The Treasury Department also has said it is looking into options to prevent the deals.

(Reporting by Emily Stephenson; Editing by Caren Bohan and Lisa Von Ahn)