Four Unknowns as Treasury Readies Report on Tax Regulations

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By Alison Bennett

Anticipation is building—and so are questions—as the Treasury Department prepares the first report for the White House on tax guidance it thinks merits action under a presidential order.

The “interim report” is due June 21, 60 days after President Donald Trump took the unprecedented step of ordering Treasury to review all tax guidance issued during the final year of the Obama administration and recommend whether “significant” regulations should be withdrawn, substantially changed, or kept.

The executive order is part of Trump’s campaign against federal regulations, which he kicked off in January with a government-wide regulatory freeze.

As the June 21 deadline approaches, tax professionals and former government officials said several critical issues need answers.

1. What regulations will Treasury flag for action?

Companies and industry groups have been lobbying vigorously, including the U.S. Chamber of Commerce, the National Foreign Trade Council, the United States Council for International Business, and the American Institute of CPAs.

Controversial debt-equity rules under tax code Section 385 are likely to be at the top of the list, Lisa Zarlenga, former Treasury tax legislative counsel and now a partner at Steptoe & Johnson LLP, told Bloomberg BNA. She said every letter sent to Treasury asked that the rules—intended to stop multinational companies from “stripping” income out of the U.S. via loans—be eased or withdrawn.

Nancy McLernon, who heads the Organization for International Investment—one of the most outspoken opponents of the rules—said her group has been involved in talks with Treasury on the issue, but it’s too soon to say what the agency might do.

Other major regulations—all the target of intense criticism—could be on the agency’s list, Zarlenga said. These could include rules to limit the use of intangibles to move income offshore, reduce avoidance by use of foreign tax credits, stop foreign investors from ducking the U.S. dividend tax, and ensure fair play in reporting foreign currency transactions.

2. What will the report look like? Will it be published?

No one knows what the format of the report might be. If it’s merely a list of regulations Treasury is considering for action, without further detail, it could lead to confusion and uncertainty, according to John Harrington, a former Treasury international tax counsel.

Taxpayers could face unnecessary compliance burdens, he told Bloomberg BNA. That’s particularly true, he said, for regulations that may not go into effect until next year. One example, he said, is the Section 385 rules. As of Jan. 1, 2018, taxpayers must document their loans to prove they’re genuine.

For these and other regulations, “You don’t want to learn in December that you’ve taken all the steps to comply, only to find out they want to repeal the rules,” Harrington, now a partner with Dentons US LLP, told Bloomberg BNA.

Both Harrington and Mark Mazur, the most recent Treasury assistant secretary for tax policy, said it’s probably tough for Treasury to go into a great deal of detail, with a shortage of the political employees required to sign off at multiple levels.

It isn’t yet known whether Treasury will publish the interim report, an action not required by the executive order. The agency only has to make specific recommendations in the final report, which must be published in the Federal Register “upon submitting it to the President.”

3. How has Treasury applied the unprecedented review criteria?

Adding to the mystery is the unique set of criteria the White House set out for scrutinizing the guidance. Officials are expected to evaluate whether regulations impose an undue burden, cost too much, or exceed the statutory authority of Treasury or the Internal Revenue Service.

Questions abound on how to determine a regulation’s cost and burden, and the former officials said it’s highly unlikely that anyone who worked on the rules during the Obama administration would ever say Treasury and the IRS didn’t have the authority to write them.

Mazur said the department’s job is made more challenging by the lack of officials such as a new Treasury assistant secretary for tax policy, various deputy assistant secretaries in tax positions, and an international tax counsel hurting the process. Without these appointees to serve as additional levels of review, it could be tough to make final decisions as to whether guidance meets the new standards, he said.

It remains unclear, he said, how Treasury will make the decisions on what goes in the interim report.

4. What happens if a regulation is—or isn’t—on the list?

Both Zarlenga and Harrington said taxpayer reaction could span the gamut if a regulation they campaigned against is on the June 21 list—but a lot depends on the level of detail provided in the list.

Zarlenga said taxpayers are likely to continue to press Treasury for information and action, while Harrington said, “You’d like to know sooner rather than later.”

Harrington said there is also a concern about the fate of regulations that don’t end up on Treasury’s action list. “Just because a regulation isn’t on the list, does that mean Treasury and IRS aren’t going to be working on other regulations?” he said. “You would hope not.”

To contact the reporter on this story: Alison Bennett in Washington at abennett@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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