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.
January 2017
