Corporate Inverters Earnings Stripping Reform Act of 2016

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 2016 2. Additional rules related to inverted corporations (a) In general Section 7874 (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 the sum of 50 percent of the adjusted taxable income of the corporation plus any excess limitation carryforward under clause (ii) (C) Additional limitation year For purposes of this paragraph, the term additional limitation year (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) Failure 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 (D) Approval year For purposes of this paragraph, the term approval year (3) Applicable entity For purposes of this subsection— (A) In general The term applicable entity (i) is a surrogate foreign corporation, determined by applying subsection (a)(2)(B)— (I) by substituting more than 50 percent at least 60 percent (II) by substituting before, on, or after after (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.

Summary: Corporate Inverters Earnings Stripping Reform Act of 2016 This bill amends the Internal Revenue Code to impose limitations on the tax deduction for interest paid by corporations which are designated as applicable entities (i.e., members of an expanded affiliated group which includes a surrogate foreign corporation which is not treated as a domestic corporation). Such an entity may not claim a tax deduction for interest that exceeds 25% of its adjusted taxable income and may not carry forward interest which is paid or accrued during the first year in which such entity becomes an applicable entity. The bill requires an applicable entity to file an annual application for an approval agreement (i.e., a prefiling, advance pricing, or other agreement involving a related-party transaction) with the Internal Revenue Service during the 10-year period after it becomes an applicable entity.