Rules Against Earnings Stripping: Wrong Answer to Corporate Inversions

Gary Clyde Hufbauer (PIIE) and Ariel Assa (JP Morgan Chase & Co.)
Policy Brief
03-7
May 2003

Earnings stripping occurs when a US subsidiary pays an excessive amount of interest to a related foreign corporation. But these proposals go far beyond dealing with tax-motivated inversion transactions. Proposals by the Bush Administration and Bill Thomas (R-CA) to amend the "earnings stripping" rules are stimulated by the fear that inverting corporations are piling on debt to their new foreign affiliates to avoid taxes, thus eroding the US corporate tax base. They apply across the board to all foreign-based multinational corporations operating in the United States, thus posing a substantial risk of collateral damage to the US economy and US international tax principles that far outweigh any benefits. Congress must therefore avoid these risks and frame a prudent tax policy.