Any Changes to Foreign Issuer Exception Prospective: Treasury

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By Leslie Pappas

Oct. 18 — Taxpayers worried about the fate of the much-welcomed “foreign to foreign” exception under new final earnings-stripping rules may glean some comfort from a Treasury official who clarified that any new guidance on areas where the government “reserved” under the regulations will be prospective.

Treasury senior counsel Kevin Nichols said Oct. 18 that “if and when” tax officials revisit those areas, any changes they make would “apply prospectively from the date of future guidance.”

The fact that Treasury “reserved” on its decision to completely exempt transactions between foreign subsidiaries of U.S. multinationals created significant concerns for taxpayers. The foreign-issuer exception is widely viewed as the headliner among many carve-outs that made a controversial set of April proposed rules (REG-108060-15) more palatable to U.S. multinational corporations.

“We got a lot of comments on the foreign-issuer question,” which led Treasury to set the issue aside for now, said Nichols, who helped draft the regulations. He spoke at the 71st annual conference of the Tax Executives Institute Inc. in Philadelphia.

Narrower Rules

The Oct. 13 final regulations (T.D. 9790)—significantly narrower than the rules the government proposed in April—is intended to stop multinational companies from “stripping” income out of the U.S. following an inversion via loans to offshore subsidiaries.

Nichols said despite Treasury’s decision to exempt foreign issuers from the rules, U.S. authorities remain interested in foreign-issued transactions.

“These are transactions in which the U.S. has an interest, but the interest is less direct,” said Nichols, who helped write the rules. “It’s something we’re continuing to study but we opted at this time not to finalize those regulations.” The issue was addressed in proposed rules () that accompanied the final guidance. The proposed rules also served as the text of temporary rules.

Tax practitioners on the panel, hosted by Skadden, Arps, Slate, Meagher and Flom LLP, said the foreign-issuer exception was one of the most important among a series of exceptions that included cash pooling, Subchapter S corporations, regulated financial companies, regulated insurance companies, regulated investment companies and real estate investment trusts.

The original proposed Section 385 regulations had a much broader reach, would have applied to all multinational enterprises—whether foreign-parented or U.S.-parented—and had the potential to impact all intercompany indebtedness regardless of how or why it was incurred, panelists said.

“They’ve done a rather elegant job of converting a set of regulations which I described last April as ‘throwing a hand grenade at a hornet’s nest,’ and they’ve now decided that a shotgun will do,” said Paul W. Oosterhuis, a senior international tax partner with Skadden’s Washington office. “And it’s not even a double-barreled shotgun. So I think they’ve done a great job of choosing a weapon that is more appropriate to the target.”

‘Considerable Controversy.’

The rules “raised considerable controversy” and a record 29,600 comments when proposed in April, said panelist Hal Hicks, a partner in international and corporate tax law in Skadden’s Washington office.

Government panelist Raymond Stahl, special counsel in the IRS Office of Associate Chief Counsel (International), indicated the IRS listened carefully to the many comments taxpayers sent in on the April proposed rules.

Stahl, who helped write the regulations, said the government made many changes to the final rules in response to those comments.

“One of the comments that resonated with me was, I remember on a panel someone saying, ‘does this mean I’ve got to send a team of auditors to every single one of my CFCs?’ And to me seemed like one of the biggest challenges if you were going for broad-based compliance,” he said, referring to controlled foreign corporations. By excluding the foreign issuers, that challenge no longer applies, Stahl said.

Tax attorneys speaking at another conference made it plain that taxpayers are taking a hard look at how the rules are affecting deals that are currently in process.

William S. Dixon, managing director at Citigroup Global Markets Inc., said the immediate issue is, “Can you close or not?”

Even though the final rules are narrower, the government decided to keep the “funding rule,” which allows it to recharacterize entire loans as equity rather than debt, Dixon said at a corporate tax conference sponsored by Practising Law Institute Inc.

“I think the system has decided to pick a very large fight on regulatory authority,” he said.

With assistance from Alison Bennett in Washington.

To contact the reporter on this story: Leslie Pappas in Philadelphia at

To contact the editor responsible for this story: Meg Shreve at

For More Information

Bloomberg BNA reporters Alison Bennett and Laura Davison discuss the final debt-equity regulations in an Oct. 18 podcast at

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