Heeding concerns raised by U.S. companies, the Department of the Treasury has announced less restrictive than expected final regulations aimed at reining in a corporate tax-saving strategy.
The rules, part of the
Inversions are legally allowed transactions in which a U.S. corporation merges with a company in a lower-tax nation and reincorporates its headquarters there, while leaving domestic operations intact. The move often reduces future tax bills.
Corporations that complete inversions have often used earnings stripping — which typically involve increasing the firm's debt to an affiliated foreign entity — as part of their tax-reduction efforts.
The rules limit the ability of corporations to treat financial instruments that are purported to be debt instead as equity in certain circumstances. Additionally, corporations that claim interest deductions on related-party loans must provide documentation for those loans. The rules also apply to related U.S. affiliates of a corporate group.
The exemptions to the regulations will allow multinational companies to use cash pools, cash sweeps other loans that are short-term "and therefore do not pose a significant earnings stripping risk," Treasury said.
Other limited exemptions allow transactions between foreign subsidiaries of U.S. multinational corporations, as well as transactions between regulated financial companies and regulated insurance companies. Transactions between mutual funds and real estate investment trusts, other than those owned by affiliated groups of companies, are also exempt.
The rules mark the latest phase of the White House effort to make corporate tax inversions less attractive . President Obama has characterized the practice as "gaming the system" and the administration has maintained the regulations were necessary because lawmakers haven't resolved differences over tax reform issues.
The regulations have stopped at least one proposed transaction. After the rules were announced in April, U.S. pharmaceutical giant
The panel's ranking minority member,
Contributing: Associated Press
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