The Treasury Department and the Office of Management and Budget (OMB) have had a longstanding quasi-agreement to exempt tax regulations from secondary review by the Office of Information and Regulatory Affairs (OIRA) within the OMB. Congressional testimony by OMB staff in 2016 revealed that, “OMB has not, as a routine matter, reviewed IRS interpretative regulations since the administration of President Carter.”
However, pursuant to a series of executive orders issued by President Trump in 2017 and 2018, tax regulations that are considered “significant” are now subject to OIRA review (with additional requirements for those considered “economically significant”). On April 11, 2018, Treasury and OMB entered into a memorandum of agreement (MOA), supplementing prior guidance in Executive Order 12866, which outlines the framework under which such tax regulations will be reviewed.
The 2018 MOA treats tax regulations as “significant” if such regulations: (1) create a serious inconsistency or otherwise interfere with an action taken or planned by another agency; (2) raise novel legal or policy issues; or (3) have an annual non-revenue effect on the economy of $100 million or more (measured against a no-action baseline). Treasury must notify OIRA of planned tax regulations and “articulate the basis for determining whether the regulatory action is [subject to OIRA review].”
On July 12, 2018, the first major set of “significant” international tax regulations passed through OIRA review under the 2018 MOA framework. The regulatory action (T.D. 9834, 82 Fed. Reg. 32,524) contained final regulations, primarily under §7874, generally adopting 2016 temporary regulations on inversions. The preamble to the final regulations provides an economic and qualitative analysis of the contained rules.
The Economic Analysis describes a historic and present overview of inversions in the United States. The preamble states that the 2017 tax act (Pub. L. No. 115-97) significantly reduced, but did not eliminate, the tax-motivated incentives for corporations to invert. In fact, certain provisions under the 2017 tax act, such as the new tax on global intangible low-taxed income (GILTI), may have increased the tax incentives of inverting.
The Qualitative Analysis measures, based on a “no-action baseline,” the alternatives (including not regulating), anticipated impacts, costs, and benefits, and the compliance costs of the final regulations. Treasury and IRS used the rules under the 2016 temporary regulations as the no-action baseline on which to measure the final regulations. By using the temporary regulations as the baseline, the modifications under the final regulations (which were minor), resulted in inconsequential impacts on revenue, costs, benefits, etc. As stated, “Treasury anticipates that any increase in tax-motivated cross-border merger activity will be relatively small… and will not result in any meaningful adverse effects on economic activity relative to the no-action baseline” (emphasis added).
An argument may exist that “no-action” by Treasury would result in the expiration of the 2016 temporary regulations. In such a case, the no-action baseline would be the existing inversion rules excluding the 2016 temporary regulations which were set to expire in 2019. However, Treasury and IRS took the position that “no-action” would, no matter how briefly, result in the application of the 2016 temporary regulations.
With just the first major set of international regulations released, we don’t have a substantial view on such analysis in circumstances with greater economic impact, or, as in the case of the pending §965 regulations, circumstances with no prior regulations to act as the baseline. The pending §965 regulations, which were submitted for OIRA review on July 13, will be the first set of regulations under the new transition tax, which was enacted as part of the 2017 tax act.
The 2018 MOA generally provides OIRA with 45 days from submission in which to complete its review. It’s worth noting that the final inversion regulations were submitted for review on March 8 and completed on June 15 (more than twice the 45-day deadline). As of the date of this blog, there are currently 79 regulatory actions submitted for OIRA review (four of which are from Treasury). Computational guidance on the new §199A deduction was submitted for OIRA review on July 23. Those regulations, identified as “economically significant,” are the first set of tax regulations marked for a special 10-day expedited review process.
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