Treasury Could Delay Earnings-Stripping Rules to Year's End

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By Kaustuv Basu, Alison Bennett and Laura Davison

June 14 — The U.S. Treasury Department may release controversial final regulations preventing U.S. multinationals from earnings stripping as late as December, as pressure mounts from lawmakers and industry groups for changes to the rules.

Robert Stack, deputy assistant secretary for international tax affairs, and Mark Mazur, assistant secretary for tax policy, briefed Senate Democrat tax staffers June 10, discussing a possible timeline, several people with knowledge of the meeting said.

Sens. Charles Schumer (D-N.Y.) and Benjamin Cardin (D-Md.) confirmed June 14 that the briefing took place.

Internal Revenue Service Commissioner John Koskinen said previously that he was looking at a Labor Day deadline for issuing a final version of the proposed regulations (REG-108060-15) under tax code Section 385, released in April (112 ITM, 6/10/16).

Talk about Treasury’s flexibility on the timing comes as multinational companies voice concern about the rules, which allow the IRS to recast intercompany debt as equity, prompting businesses to see them as hampering commonplace intercompany transactions.

A broad coalition of 69 business groups, in a June 14 letter, urged top congressional tax writers to help them slow down Treasury regulations to curb big companies from stripping income out of the U.S.

Delays for Days?

The groups, spanning industries from manufacturing to petroleum, asked leaders of the Senate Finance and House Ways and Means Committees to press Treasury to delay the effective date of the rules and extend the July 7 comment deadline, “at a minimum.” The Institute for International Investment, which released the letter, said the rules affect far more companies and industries than Treasury originally intended and would damage the U.S.'s ability to compete globally.

Big business groups signing the letter included the Business Roundtable, the United States Council for International Business, the U.S. Chamber of Commerce and the National Association of Manufacturers.

Lawmakers are considering a hearing on the regulations as they try to build bipartisan support before asking the Obama administration to moderate the rules. Although Treasury won't back away from the broad approach intent of the regulations, the department is open to changing specific parts of the rules outside the intent of curbing earnings stripping, sources said.

Parts that could be changed include foreign-to-foreign cash pooling transactions and some unintended consequences connected to S corporation termination events, according to people familiar with the discussions between Mazur, Stack and the Senate Democrat tax staff members.

Cardin told Bloomberg BNA that he is in favor “of closing inversion loopholes and income stripping. We strongly support what’s being done. We also want to make sure we don’t have unintended consequences.”

Criticism of Guidance

The rules have drawn attacks from many sides. The guidance is intended to stop big companies from using loans to subsidiaries to shift income offshore (65 ITM, 4/5/16).

It could recharacterize loans between related parties of big corporate groups as involving stock, or equity, rather than tax-favored debt. This could cause deductions on interest payments to go up in smoke and saddle companies with a big price tag of withholding taxes.

The groups told lawmakers that the rules make intercompany financing uncertain and could lead to problems in other countries, where trading partners might not recognize recharacterized debt as equity. This could lead to double taxation and treaty conflicts, they said.

To contact the reporters on this story: Kaustuv Basu at kbasu@bna.com, Alison Bennett at abennett@bna.com and Laura Davison at ldavison@bna.com , in Washington

To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com

For More Information

Text of the business coalition letter on REG-108060-15 is at http://src.bna.com/fTl.