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March 18 — The IRS released final regulations that continue its efforts to prevent U.S. companies from doing tax-free repatriations and put the brakes on some corporate inversion deals.
The rules (T.D. 9760, RIN 1545-BJ74) are designed to stop domestic companies from escaping taxes through deals involving property transfers to foreign corporations under tax code Section 367.
Issued March 18, the guidance is the final version of 2013 temporary regulations (T.D. 9615) that first took aim at these transfers. The Internal Revenue Service gave no ground on its decision to yank one of two exceptions to a “coordination rule”—exceptions that allow companies to escape taxes on these transactions.
The agency said it will continue to assess whether an exception applies by looking at an entire deal. Taxpayers will still have to use a test that says a domestic transferee company can't have a greater basis in the transferred assets than the transferor.
No Backing Down on Basis Test
“The Treasury Department and the IRS remain concerned that the coordination rule exceptions may be utilized to inappropriately reduce U.S. tax, and therefore decline to liberalize the basis comparison test,” the agency said in the preamble to the guidance.
John Harrington, a partner with Dentons USA LLP, told Bloomberg BNA March 18 that the guidance shows the government's continued determination to fight the flow of money offshore—and stop efforts by U.S. companies to bring offshore earnings home tax-free.
The former Treasury international tax counsel told Bloomberg BNA that while the rules deal with outbound transfers, those transfers are rarely done without the U.S. company getting something back, such as stock, cash or other types of property.
Harrington said the fact that the government issued the rules without substantial changes and didn't back down on any of its positions demonstrates that companies should tread cautiously in these deals.
“You expect to see these rules tightened, not liberalized from a policy standpoint,” he said. Harrington noted that Treasury issued the final rules on the eve of the 2013 rules expiring.
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