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A tax loophole for U.S. companies operating overseas just got tighter

Treasury Secretary Jack Lew speaks during a Brookings Institution forum last month. (Andrew Harrer/Bloomberg)
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The Treasury Department sought Thursday to limit the benefits that 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 in that country. Treasury issued the 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 aimed to end that practice.

The department said it hoped 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 J. Mazur, assistant secretary for tax policy at Treasury.

The move is the latest effort by President Obama’s administration to pin down the more than $2 trillion in profits that 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 Brussels could get to it first is salt in the wound for Washington.

Treasury Secretary Jack Lew has accused European officials of singling out 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,” Apple Chief Executive Tim Cook said in an interview last month. “They’re arguing about who they should be paid to.”

Apple declined to comment the guidance issued Thursday. The company has been a flashpoint 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 profit once the U.S. corporate tax rate is reduced -- a proposal supported by Obama as well as Republican presidential candidate Donald Trump. Democratic nominee Hillary Clinton has not specified a target for business tax rates.

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

Despite siding with Apple in its dispute with Europe, the administration has rankled business groups with its attempts to crack down on corporate tax avoidance at home. Last month, the U.S. Chamber of Commerce and the Texas Association of Business filed a lawsuit challenging regulations aimed at blocking companies from merging with smaller, foreign firms to circumvent paying U.S. taxes, a process known as inversion. Treasury has said it plans to deploy its rule-writing authority -- including steps such as Thursday’s guidance -- to address problems in the tax code in the absence of broader reform from Congress.

“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.