Law and Regulations

Treasury takes new step to keep corporate taxes in the US

Treasury finalizes rules to keep companies in US

The Treasury Department announced regulations Thursday that it hopes will keep corporate taxes in the United States by making it more difficult for companies to take advantage of tax inversions.

Treasury Secretary Jacob Lew said the department and the Internal Revenue Service hope the new regulations will "fix our broken tax system." The rules aim to make corporate tax inversions less appealing for American companies. Tax inversions have fueled controversy as corporations can get a lower tax rate by acquiring a smaller foreign competitor, allowing the company to move its tax address overseas.

In particular, the department seeks to end the "earnings stripping" process in which a company pays deductible interest to a parent company or affiliate in another country with lower taxes. Corporations will also have to file documentation on their interest deductions on related-party loans.

"We have taken a series of actions to make it harder for large foreign multinational companies to avoid paying U.S. taxes and reduce the incentives for U.S. companies to shift income and operations overseas," Lew said in a statement. "Such tax avoidance practices are wrong and should be stopped."

In April, President Barack Obama called on Congress to close loopholes, which he argued would boost tax revenue and create more funding for infrastructure and education.

After the Treasury announced new regulations in April to reduce tax inversions, Pfizer terminated its $160 billion deal to acquire Allergan.

The regulations announced Thursday target "earnings stripping" techniques which allow companies to take advantage of their tax inversions.

Despite corporate America's misgivings, the department has pushed forward with these regulations. It said, however, that it has taken stakeholder concerns into consideration and relaxed a few points in the final regulations.

The Treasury said it will provide a "broad exemption" for cash pools as well as short-term loans. It also said there will be "limited exemptions for certain entities where the risk of earnings stripping is low." Exceptions for distributions were "significantly expanded" for "ordinary business transactions," the department said.

The Treasury Department also pushed back the effective date to Jan. 1, 2018, giving companies more time to comply with the new regulations.