The Obama administration late Thursday announced a final rule designed to thwart the controversial practice of corporate inversions, used by big corporations to escape U.S. taxes.
Inversions often involve a U.S. company merging with a smaller foreign partner, moving headquarters there, often just on paper, and then using creative accounting duck U.S. taxes.
Congress has refused to block the practice, and the Treasury Department has been using its authority over the tax system to tweak rules in order to make it harder for companies to pull off inversions.
The rule announced Thursday narrowly addresses a practice called earnings stripping, where a U.S.-based corporation would increase its debt to the smaller parent company and the interest on the “loans” from the smaller company can be written off against its U.S. earnings.
In a call with reporters to announce the finalized rule, Treasury Secretary Jacob Lew said the practice of earnings stripping is “a contributing factor to the erosion of the U.S. corporate tax base.”
A senior Treasury official, briefing reporters on condition of anonymity as the agency’s matter of policy, said the administration is trying with its third action against parts of the inversion process to make corporations think twice about the controversial practice.
“What this does is make it less profitable to undertake a corporate inversion,” the official said. “Companies will have to make a calculus of what effect this has.”
Earnings stripping can reduce a company's tax bill by generating large interest deductions when that company simply increases its debt to an affiliated foreign firm.
Treasury Secretary Jacob Lew
Both Hillary Clinton and Donald Trump have promised to crack down on inversions if elected. Democrats have pushed for legal changes in Congress, but Republicans who control both chambers have balked, saying they want to address inversions through a broader overhaul of corporate taxation. Trump’s steep proposed reduction of the corporate tax rate to 15 percent would effectively eliminate the need for inversions.
After meeting with companies and trade associations, the Treasury Department delayed the implementation of a key part of the rule_ that companies have to document their internal related-party loans_ until Jan. 1, 2018.
The department also created an exemption that allows some forms of short-term loans to be exempt from the new rule.
A number of pharmaceutical companies embraced inversions, merging with Irish companies, drawing attention. Chiquita Brands drew attention for planning to leave its North Carolina headquarters for Ireland. Shareholders quashed that plan and instead the company was bought by two Brazilian companies, who took Chiquita private.
Kevin G. Hall: 202-383-6038, @KevinGHall
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