Tax rule tightened for companies trying to keep foreign profits offshore

WASHINGTON — The Treasury Department sought Thursday to limit the benefits U.S. companies can claim when they pay taxes overseas, an effort to cushion the blow from Europe’s demand that Apple pony up $14.5 billion in unpaid taxes.

In new guidance, the department tightened regulations requiring American businesses to bring foreign profits back home – a process known as repatriation – if they want to get credit for taxes paid overseas.

Treasury issued a rule last year to prevent companies from enjoying a foreign tax credit when the related profits remained offshore. But businesses circumvented it by shifting money within their foreign subsidiaries, and Thursday’s guidance is designed to end that practice.

The department said it hoped that the new notice would reduce corporate America’s incentive to “take advantage of our broken international tax system.” Washington is worried that mounting international tax obligations will eat away at what’s left for Uncle Sam.

“Today, we are closing another tax loophole that contributes to the erosion of our tax base,” said Mark Mazur, assistant secretary for tax policy at Treasury.

It’s the latest effort by President Obama’s administration to pin down the more than $2 trillion in profits U.S. companies hold overseas.

Unlike most developed countries, the United States taxes businesses on profits generated anywhere in the world, and the bill comes due once the money returns to American shores.

That has encouraged many companies to keep their international profits overseas to avoid the hefty 35 percent tax rate at home.

For years, partisan gridlock has stalled attempts to encourage businesses to repatriate that income and fix the corporate tax code.

Meanwhile, Apple has amassed a cash stockpile of more than $200 billion, most of it offshore. That Europe could get to it first is salt in the wound for Washington.

Treasury Secretary Jack Lew has accused European officials of targeting American companies for investigation.

The European Commission ruled last month that Apple’s ultra-low tax rate on its operations in Ireland ran afoul of European Union rules that prevent member countries from offering excessive incentives to businesses. Apple and Ireland dispute that decision.

“People really aren’t arguing that Apple should pay more taxes,” Tim Cook, Apple’s chief executive, said in an interview last month. “They’re arguing about who they should be paid to.”

Apple has been a flash point in the debate over business tax reform not only because of its household name recognition but also because it is the single largest corporate taxpayer in the country.

Cook has said he would be willing to repatriate overseas profits once the U.S. corporate tax rate is reduced.

European officials have also investigated other big names, such as Starbucks and Amazon, for possible tax avoidance. In an op-ed in the Wall Street Journal this week, Lew decried efforts to impose what he called “unfair retroactive penalties.”

The administration has rankled business groups with its attempts to crack down on corporate tax avoidance by using its rule-writing authority in lieu of broader reform in Congress.

Last month, the U.S. Chamber of Commerce and the Texas Association of Business filed a lawsuit challenging regulations aimed at deterring companies from merging with smaller, foreign firms to circumvent paying U.S. taxes, a process known as inversion.

“I hope that the high level of attention following the European Commission’s actions will help to lay the foundation for the new Congress to take action in the early days of a new administration,” Lew wrote in the Wall Street Journal.