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WASHINGTON - Today, Treasury is announcing our final earnings stripping regulations. Earnings stripping is commonly used to minimize taxes after an inversion, and a contributing factor to the erosion of the U.S. corporate tax base.
For years, this administration consistently has called for comprehensive business tax reform to fix our broken tax system. 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.
In April, we announced our third action to address inversions, as well as proposed regulations to address earnings stripping by distinguishing debt from equity. 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, without financing new investment in the United States. This technique is frequently used after an inversion to minimize taxes.
As we worked to finalize our earnings stripping regulations we sought comments to help narrow the rule and avoid unintended consequences. We engaged extensively with businesses, tax experts, lawmakers, and the public and listened to their comments and recommendations on ways to potentially improve and better focus the regulations.
We have heard from thousands of citizens who support our work to address tax avoidance. We have also heard from many U.S. companies that the proposed rules could unduly constrain ordinary business practices.
After carefully considering this feedback, we have addressed stakeholder concerns by more narrowly focusing the final regulations on aggressive tax avoidance tactics and providing certain limited exemptions.
There are several key areas of changes we made as we finalized the rules.
In the proposed rules we asked for feedback on how to address cash pools, cash sweeps, and similar arrangements for managing cash. In response to thoughtful feedback, Treasury is providing a broad exemption for cash pools and loans that are short-term in both form and substance.
The final rules also provide certain exceptions for foreign subsidiaries of U.S. multinational corporations, pass-through businesses, and regulated financial institutions.
And we have relaxed the timing on documentation requirements and extended the deadline by one year to give companies additional time to develop processes to comply.
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.
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.
That is why in April we also released an updated framework for business tax reform, which outlines the administration’s proposals to date as a guide for future reform. The Administration’s plan would substantially reduce corporate incentives to shift income and investment abroad, while tightening up loopholes and modernizing the international tax system.
For the remainder of the administration we will continue to make the case for business tax reform. There is a growing bipartisan consensus about the urgent need to act. Recent developments, such as the European Commission’s State aid investigations, have brought additional attention to the issue.
I am hopeful that Congress will take action on fixing our business tax system in the early days of the next administration.
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