Section 367(d) Intangibles Rules Target Current Abuses

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Oct. 20 — Proposed regulations attacking “aggressive” positions on outbound transfers of intangibles are aimed at abuses the government is seeing now, a Treasury official said.

Brenda Zent, a special adviser in Treasury's Office of International Tax Counsel, said officials set an immediate effective date because “we view the regulations as shutting down an abuse.” If they had a delayed effective date, she said, Treasury was concerned that there would be a “mad rush” of transactions before the government closed the door.

The rules significantly affect the technology and pharmaceutical industries, among a range of others.

Exceptions Eliminated

Issued Sept. 14, the rules (REG-139483-13) eliminate exceptions to tax under tax code Section 367(d) for foreign goodwill and going concern to take away incentives for inappropriate transfer pricing positions on such transfers. The guidance also limits the scope of property eligible for the active trade or business exception under tax code Section 367(a) (178 DTR G-4, 9/15/15).

Speaking Oct. 20 on a panel hosted by the D.C. Bar Taxation Section's International Tax Committee, Brent said despite the effective date, the government is still accepting comments on the proposed rules and will take them into account as final rules are being written.

She shared the panel with two other government officials, including Brian Jenn, a Treasury attorney-adviser, and Daniel McCall, special counsel to the associate chief counsel (international) at the Internal Revenue Service.

Ample Government Authority

All three stressed that the government has ample authority to craft tighter rules for transfers of intangibles under Section 367—authority, Zent stressed, that was granted by Congress to address situations where there is a potential for abuse.

Questions as to whether the tighter rules were consistent with congressional intent were raised by both private-sector attorneys on the panel, including Timothy Shuman, a partner with McDermott, Will & Emery LLP, and Layla Aksakal, a member of Miller & Chevalier Chartered.

Transaction of Concern

Zent told Bloomberg BNA following the panel that one example of a transaction of concern would be if a taxpayer incorporates a foreign branch in a deal that generates “a lot of identifiable intangible property” that would otherwise be taxable under Section 367(d). The taxpayer then takes an “aggressive transfer pricing position,” she said, by stating that the assets were goodwill and not taxable under the exception that the government is now taking away.

Speaking on the panel itself, Aksakal asked whether the government's concern could be summarized as Treasury and the IRS disagreeing with a taxpayer's methods for valuing assets. Treasury's Jenn said the worry goes beyond valuation.

Concept of Goodwill Difficult

He said grappling with the question of “what exactly do we mean when we talk about goodwill” is very difficult. He noted that Treasury is seeing taxpayers take the position that intangibles are foreign goodwill in situations where a company is doing business in the U.S., with U.S. employees and U.S. customers.

Officials were also asked why the government didn't take the route of simply tightening definitions rather than eliminating the exceptions altogether.

Zent said Treasury considered that approach, but looking at the question of what it means to be a foreign branch didn't resolve the problem of whether there was foreign goodwill generated by that branch. Jenn said it's a tough question, particularly in light of the way multinationals operate. “We weren't able to find a way forward on attribution of goodwill to a foreign branch,” he said.

Section 482 Regulations

The panel also discussed the temporary rules (T.D. 9738) that were issued on transfer pricing transactions under Section 482 as part of the intangibles package.

Jenn said the rules are intended to serve as “a reminder to taxpayers, some of whom seem to have forgotten, that you have to take into account all the value that is transferred, regardless of the form or character of the transaction.” The temporary rules are effective Sept. 14, 2015, he said, under the rationale that “these regulations were just emphatically telling you to do what you were already supposed to be doing.”

To contact the reporter on this story: Alison Bennett in Washington at
To contact the editor responsible for this story: Brett Ferguson at

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