S. 2786 — Introduced in Senate

II 113th CONGRESS 2d Session S. 2786 IN THE SENATE OF THE UNITED STATES September 10, 2014 Mr. Schumer (for himself, Mr. Durbin, Mr. Brown, Mr. Coons, Mr. Rockefeller, Ms. Stabenow, Mr. Cardin, Mr. Reed, Mr. Menendez, Mr. Markey, Mr. Merkley, Ms. Baldwin, Mr. Levin, and Ms. Warren) introduced the following bill; which was read twice and referred to the Committee on Finance A BILL To amend the Internal Revenue Code of 1986 to prevent earnings stripping of domestic corporations which are members of a worldwide group of corporations which includes an inverted corporation and to require agreements with respect to certain related party transactions with those members. 1. Short title This Act may be cited as the Corporate Inverters Earnings Stripping Reform Act of 2014. 2. Additional rules related to inverted corporations (a) In general Section 7874 of the Internal Revenue Code of 1986 is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection: (g) Special rules applicable to earnings stripping and related party transactions (1) Modifications of limitation on interest deduction (A) In general In the case of any additional limitation year of a corporation which is an applicable entity, section 163(j) shall be applied with the modifications described in subparagraph (B). (B) Modifications for additional limitation years For purposes of subparagraph (A), the modifications described in this subparagraph are as follows: (i) No carryover No carryforward to any other taxable year shall be allowed under section 163(j)(1)(B) for interest paid or accrued during any additional limitation year with respect to which a deduction was disallowed to the corporation under section 163(j). (ii) Rules for determining whether interest limitation rules apply In applying section 163(j)(2) to determine whether section 163(j) applies to the corporation for any additional limitation year— (I) subparagraph (A)(ii) shall be disregarded, and (II) subparagraph (B)(i)(II) shall be applied by substituting 25 percent of the adjusted taxable income of the corporation for the sum of 50 percent of the adjusted taxable income of the corporation plus any excess limitation carryforward under clause (ii) for purposes of determining the corporation's excess interest expense for the year. (C) Additional limitation year For purposes of this paragraph, the term additional limitation year means, with respect to any corporation which is an applicable entity, any taxable year beginning on or after the first day of the later of the corporation's— (i) first taxable year beginning on or after the date of enactment of this subparagraph, or (ii) first taxable year for which the corporation is an applicable entity. (2) Annual application for agreements on return positions (A) In general Each applicable entity shall file with the Secretary an application for an approval agreement under subparagraph (C) for each approval year. Such application shall be filed at such time and manner, and shall contain such information, as the Secretary may prescribe. (B) Failures to comply If an applicable entity fails to file an application under subparagraph (A), or the approval agreement does not contain the necessary provisions described in subparagraph (C), for any taxable year, then for such taxable year— (i) there shall not be allowed any deduction, or addition to basis or cost of goods sold, for amounts paid or incurred, or losses incurred, by reason of a transaction between the entity and a foreign related person, (ii) any transfer or license of intangible property (as defined in section 936(h)(3)(B)) between the entity and a foreign related person shall be disregarded, and (iii) any cost-sharing arrangement between the entity and a foreign related person shall be disregarded. (C) Approval agreement For purposes of subparagraph (A), the term approval agreement means a prefiling, advance pricing, or other agreement specified by the Secretary which contains such provisions as the Secretary determines necessary to ensure that the requirements of sections 163(j), 267(a)(3), 367, 482, and 845, and any other provision of this title applicable to transactions between related persons and specified by the Secretary, are met. (D) Approval year For purposes of this paragraph, the term approval year means, with respect to any applicable entity, any taxable year beginning on or after the date of enactment of this subparagraph if such taxable year is within the 10-taxable-year period beginning with the first taxable year for which the entity is an applicable entity. (3) Applicable entity For purposes of this subsection— (A) In general The term applicable entity means any corporation which is a member of an expanded affiliated group which includes an entity which— (i) is a surrogate foreign corporation, determined by applying subsection (a)(2)(B)— (I) by substituting more than 50 percent for at least 60 percent in clause (ii) thereof, (II) by substituting before, on, or after for after in clause (i) thereof, and (III) by disregarding the matter following clause (iii) thereof, and (ii) is not treated as a domestic corporation by reason of subsection (b). (B) Special rule for inclusion of noncorporate entities For purposes of subparagraph (A), a partnership or other entity (other than a corporation) shall be treated as a member of an expanded affiliated group if such entity controls (as determined under section 954(d)(3)), or is controlled by (as so determined), members of such group (including any entity treated as a member of such group by reason of this sentence). . (b) Effective date The amendments made by this section shall apply with respect to taxable years beginning after the date of enactment of this Act.