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April 19 — The government won't recharacterize transactions immediately under controversial new regulations designed to stop companies from “stripping” income out of the U.S., a Treasury Department official said.
“We view these rules as prospective, and they will be effective on finalization,” Kevin Nichols, a senior counsel in the Office of International Tax Counsel, said April 19. Even though there's a grandfather clause for transactions taking place before the rules are final, deals won't be recast until after the regulations reach their final form, he said.
The issue is important for companies waiting anxiously for answers about how to apply the proposed regulations.
Issued April 4 along with regulations specifically aimed at corporate inversions, the earnings stripping rules target some transactions involving loans from foreign parent companies to their U.S. subsidiaries.
They hand the Internal Revenue Service the ability to take away deductions on interest payments for those loans, as well as to impose withholding taxes on those payments by saying the deals involve equity instead of tax-deductible debt.
In putting in a grandfather clause, “We didn't want there to be a race to the exit,” Nichols said at a forum on the new rules sponsored by the D.C. Bar Taxation Section. “There will not be recharacterization of debt issued today.”
Brett York, another Treasury official on the panel with Nichols, said the government is aiming to quickly finalize the rules. With the guidance on an expedited path, it's critical for companies to get their comments in as soon as possible, York, an attorney-adviser in the Office of Tax Legislative Counsel, said. The official deadline for comments set by the government is July 7.
No Deadline Set
Also on the panel was Brenda Zent, a special adviser in the Treasury Office of International Tax Counsel. She said while there is no specific deadline for a final version of the rules, it is a high priority for the government.
Her comments came after IRS Commissioner John Koskinen said April 12 that the agency was hoping to get its major regulation projects done by the Labor Day holiday in early September, prior to the change of administration.
Koskinen made the comment to reporters when asked about the inversions guidance following a hearing (71 DTR G-5, 4/13/16).
Zent said the government hasn't decided whether it will finalize the proposed rules (REG-108060-15) under tax code Section 385 at the same time it issues a final version of temporary anti-inversion rules (T.D. 9761) under Section 7874 (65 DTR GG-1, 4/5/16).
“I don't think we want to hold up one project for the other,” Zent said. In addition, she said, it's possible Treasury could issue yet another set of inversions guidance in addition to 2014 and 2015 notices and the 2016 regulations. “We will continue to consider options,” she said. “There might be a ‘round' four.”
Zent told Bloomberg BNA following the panel that she couldn't provide any additional details on issues the government might address as it considers more guidance.
The government's aim in its guidance on recharacterizing debt as equity is to look at distributions of debt and economically similar transactions, according to John Merrick, a senior level counsel in the IRS Office of Associate Chief Counsel (International). Among other goals, Merrick said the rules are intended to address concerns about the use of intragroup debt.
Government officials also discussed the anti-inversion regulations released April 4 under tax code Section 7874.
Zent said the rule in the guidance that cracks down on serial acquisitions doesn't depend on whether there is a plan in place to do the acquisitions. “We don't think it's appropriate if you're doing these acquisitions over time,” she said.
Merrick said, however, that another rule dealing with multi-step acquisitions is “fairly limited” and only applies to transactions that are part of the same plan. “That determination would be made before transactions are characterized,” he said.
By comparison, he said, rules that apply to “expatriated entities” are intended to be very broad.
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