New rules target 'egregious tax behavior,' says Treasury's Lew

Treasury Sec. Lew: Stopping the erosion of our corporate tax base
Treasury Sec. Lew: Stopping the erosion of our corporate tax base

U.S. Treasury Secretary Jack Lew said regulations announced Thursday were intended to further limit tax inversions and reduce their appeal for American corporations.

In an interview with CNBC, Lew explained that the new requirements are an "important statement" against the use of inversions and "egregious" tax avoidance. 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.

"I think when the rule is studied, it will be clear that this is meant to get at egregious tax behavior, not at normal business practices," he said.

In particular, the Treasury Department sought 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.

In a Thursday statement, Lew said that the Treasury and the Internal Revenue Service hope the new regulations will "fix our broken tax system."

"There's a lot of frustration in the United States and around the world in tax systems that just don't seem fair," Lew said in the interview. "I think we've shown that we're taking tough action to stop the egregious behavior, but we're also listening and responding to reasonable concerns."

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, which Lew told CNBC is "what the rule-making process is supposed to be."

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.