The department’s latest batch of rules would make more difficult a practice known as “earnings stripping” that enables companies to lower their taxable U.S. profits. Using this strategy, the U.S. subsidiary of the inverted company can take on a loan from its foreign parent company. The interest payments on that debt can then be deducted from the U.S. company’s taxable income and is taxable at a low rate in the country in which the inverted firm is based.

AD

AD

Earnings stripping is typically one of the most attractive parts of an inversion and the Treasury Department wants to make the process more onerous.

“Today, we are announcing additional actions to further rein in inversions and reduce the ability of companies to avoid taxes through earnings stripping,” said Treasury Secretary Jacob J. Lew.

So far, the agency’s efforts have had limited effect and it is unclear whether the latest rules will be much more successful.

Pressure on the Obama administration began to build last year when pharmaceutical giant Pfizer announced its deal with Botox maker Allergan that would move its headquarters to Ireland. The Pfizer-Allergan deal is the largest inversion ever and is expected to save the firm up to $35 billion in taxes.

AD

It is unclear whether the new rules will impact that deal, but they could, said Laurence M. Bambino, a tax attorney at New York-based law firm Shearman & Sterling. “These rules are expansive and will take some time to digest, but they appear intended to make recently announced inversions awaiting completion such as Pfizer more challenging from a U.S. tax standpoint,” Bambino said.

AD

Currently, in order to escape some of the restrictions that Congress and Treasury have put in place to stop inversions, the shareholders of the U.S. company must own less than 60 percent of the combined company. Pfizer’s shareholders would own 56 percent of the combined company, for example. But that is in part because Allergen has completed previous acquisitions of U.S. companies that have increased its size. The biggest was when the former Actavis bought Allergan.

Under the new rules, stock that Allergan has issued within the past three years to acquire U.S. companies wouldn’t be included in the calculations.

AD

Pfizer is reviewing the Treasury Department’s announcement, Joan Campion, a company spokeswoman, told Bloomberg. “We won’t speculate on any potential impact until the review is completed,” she said.

AD

Business leaders have said that companies have few choices as long as the U.S. corporate tax rate remains the highest in the developed world, 35 percent.

Lawmakers and the Obama administration have struggled to come up with a solution for inversion. In his latest budget proposal, President Obama calls for imposing a 19 percent tax on foreign profits — significantly lower than the current rate. But there is little political momentum to address the issue during the 2016 presidential election cycle and Republicans and Democrats remain split on an approach.

AD

Rep. Lloyd Doggett (D-Tex.) , who along with other lawmakers has been pressing the Treasury Department to act on the issue, said he was pleased the department had issued new regulations. “While this tax guidance is not as thorough as it should be, I hope that it will discourage serial inverters like Allergan and thereby the Pfizer merger,” he said in a statement.