TREASURY EASES EARNINGS STRIPPING RULEBy
The Treasury Department eased the application of its new earnings stripping rule by including some exemptions sought by business groups. The rule, which goes into effect in 2018, adds another arrow in the Obama administration’s quiver against corporate inversion.
After a corporate inversion, multinational corporations often use a technique called “earnings stripping” to minimize U.S. taxes by paying deductible interest to the new foreign parent or one of its foreign affiliates in a low-tax country. This technique can generate large interest deductions without requiring a company to finance new investment in the United States. Because of concerns from business groups in the wake of the proposed rule, the Treasury, in the final rule, provided a broad exemption for cash pools and other loans that are short term in both form and substance and therefore don’t pose a significant earnings stripping risk.