Multinationals May See Shift Toward International Tax Revamp

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By Alison Bennett

Nov. 9 — Incoming President Donald Trump is likely to focus on a push toward international tax overhaul and away from the current U.S. crackdown on inversions and earnings stripping, practitioners told Bloomberg BNA.

“I think all of that goes to the back burner,” Paul Schmidt, chair of tax at BakerHostetler LLP, said Nov. 9. He and other practitioners said with Republican control of both houses of Congress and a Trump White House, the path may be more clear for a broad move to the territorial tax system many multinationals want.

The view that inversions are happening because the U.S. isn’t competitive may prevail, according to both Schmidt and Lisa Zarlenga, a tax partner at Steptoe & Johnson LLP. Instead of taking action to stop tax abuses by multinationals, momentum is likely to build on the idea of “Let’s fix the international tax system,’” Zarlenga said. A big part of the debate is likely to be on taxing the income these companies bring back to the U.S.

Kimberly S. Blanchard, a partner at Weil, Gotshal and Manges LLP, predicted some version of a territorial tax system “is something that would be taken seriously.”

Rules Headed for Chopping Block?

As a re-do potentially builds steam, much of the intense work done by the current administration to stop abuses by multinational corporations may be headed for the chopping block, practitioners said.

The Trump administration is likely to closely re-examine two sets of controversial international rules and potentially pull parts or all of them, practitioners said Nov. 9.

One, known as the debt-equity rules under tax code Section 385 (T.D. 9790), would crack down on multinational companies attempting to “strip” income out of the U.S. using loans to subsidiaries. The other, known as the anti-inversion rules under Section 7874 (T.D. 9761, REG-135734-14), would stop companies from changing their tax addresses to shrink their U.S. taxable income.

The precise fate of the earnings-stripping rules isn’t yet clear, tax attorneys said. Schmidt said a Trump White House likely would change their approach at a minimum, and repeal parts or the entire regulatory package moving forward. Pressure to get rid of them is likely to be intense.

“I would hope that any Republican administration would treat tax reform as a priority by immediately repealing the Section 385 rules,” and then work on tax overhaul according to a blueprint set out by the House, Jeffrey Paravano, managing partner at BakerHostetler, said in the days leading up to the election.

Inversions Guidance May Last Longer

The progress toward potentially axing the inversions rules may not be as fast, practitioners said.

John Harrington, a tax partner with Dentons US LLP, said Nov. 9 that Trump might not immediately take aim at the rules. The president-elect campaigned on keeping companies and jobs in the U.S., so it’s not a done deal that he would undo rules to combat inversions right away.

But that could change, Harrington said. The former Treasury international tax counsel said he expects the Trump administration to closely scrutinize the rules—already under fire in the courts—and potentially take action against them.

With international tax revisions on the near horizon in Congress, another big question mark is how Trump will handle interaction with other jurisdictions on the world stage.

The incoming president is already known for criticisms of other countries and a world view focused on America. Practitioners said he could back out from most of a multi-country project to tackle base erosion and profit shifting (BEPS) developed by the Organization for Economic Cooperation and Development.

Country-by-Country Reporting Could Survive

Schmidt said, however, that U.S. participation in the BEPS-created “country-by-country” reporting regime could continue. The system requires multinational corporations to report information separately on each of their foreign operations.

Zarlenga said the U.S. is operating in a climate where other countries already have adopted country-by-country reporting and there is “pressure for the IRS to do something. I actually think that message will be consistent. My guess is that you won’t see a huge change in that area.”

Weil’s Blanchard said the outlook is much more bleak for tax treaties—a key priority for multinational corporations. “Clearly, we’re not going to see any treaties for the next four years,” she told Bloomberg BNA.

Even the U.S. model treaty could be rolled back, according to Schmidt.

“I’m not sure if the new administration will embrace the treaty,” Schmidt said. He criticized provisions that cut off benefits to some inverted companies and to some taxpayers doing business in countries with “special tax regimes,” calling them “almost legislative.”

“I would not be surprised if the new administration revisits that,” he said.

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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