Treasury department looks to end tax benefits of corporate inversions

WASHINGTON, Oct. 14 (UPI) -- The U.S. Department of Treasury announced new rules on Thursday aimed at lessening the tax benefit of corporate inversions.

New regulations issued by the Treasury Department will make it more difficult for corporations to engage in earnings stripping, a technique used to minimize taxes in the United States after a company moves overseas or is bought by a foreign company, officials say.

"For years, this administration consistently has called for comprehensive business tax reform to fix our broken tax system," Treasury Secretary Jacob Lew said in a statement. "In the absence of congressional action, however, it is Treasury's responsibility to use our authority to protect the tax base. To that end, 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 move overseas."

To avoid paying taxes in the United States, a company could previously receive a loan from their foreign-based parent -- in inversions, companies often set up a shell for the new "home" of the company, determining American offices to be subsidiaries -- and pay deductible interest to the foreign parent rather than taxes to the government.

The new rules will require companies to document the loans and limit forms of loans that lower tax burdens for a company.

The rules were first proposed in April, but the Treasury Department held off on officially issuing them while accepting comment from the public and from concerned corporate interests in order to protect normal business practices not used to avoid taxation.

As a result, certain types of cash pools and short-term loans have been exempted, some entities will be exempted from the rules because they are at lower risk for engaging in earnings stripping, ordinary business practices are exempt from the rules, and documentation requirements will be eased slightly.

Although Lew thinks the new rules will help make corporate inversions less lucrative and reduce earnings stripping, he said more needs to be done by Congress to actually correct the problem.

"Coupled with our previous actions to address corporate inversions, these changes balance the operational needs of companies while preventing the erosion of our U.S. corporate tax base," Lew said. "Nonetheless we cannot fully solve problems like inversions and earnings stripping through administrative action alone. The real solution is for Congress to enact comprehensive business tax reform with specific anti-inversion and earnings stripping provisions."