Trump Order Sparks Debate Over Inversions, Debt-Equity Rules

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By Alison Bennett and Allyson Versprille

The Treasury Department will review all “significant” regulations from 2016, a move that drew a range of reaction from across the political spectrum, with some calling on the administration not to water down anti-inversion regulations and others urging repeal of controversial rules to combat earnings stripping.

President Donald Trump signed an executive order April 21 requiring Treasury to examine “significant” rules from the final year of President Barack Obama’s term and recommend whether they should be modified or repealed if they are too burdensome or complex.

The order requires Treasury to recommend action on all significant rules, in a report due in 150 days, with an interim report due in 60 days.

Debate Continues

Although Treasury Secretary Steven Mnuchin said April 21 that the administration plans to review “every single significant regulation,” the action brought into sharp relief the wrangling in both Congress and the business community over what to do with the two sets of regulations, released together in April 2016.

One, which has drawn corporate criticism since it was published under tax code Section 385, would try to stop foreign multinationals from moving cash out of the U.S. via inbound loans to U.S. subsidiaries, by treating that debt as equity.

The other, issued under tax code Section 7874, would curb companies from inverting, or changing their tax addresses, to lower their U.S. tax bills.

Range of Regulations to Be Reviewed

Speaking at an April 21 briefing before Trump signed the order, Mnuchin said the inversion rules will be reviewed, although the administration is “not targeting just those.” The rules are “obviously one of the significant things we’d be looking at,” Mnuchin told reporters.

His comments brought immediate reaction from all sides of the political spectrum.

House Ways and Means Committee Chairman Kevin Brady (R-Texas) said April 10 that he welcomed the regulatory review and called on the administration to roll back both the Section 385 rules and controversial estate tax rules under Section 2704.

On the other side of the aisle, Democrats sharply criticized the notion that Treasury might loosen the inversion rules.

“Signaling that restrictions on such inversions might be eliminated or watered down is not putting America first,” Rep. Sander Levin (D-Mich.) said in a statement. Sen. Chris Van Hollen (D-Md.) said he would “fight tooth and nail” against any efforts to make it easier for corporations to move their tax address overseas.

Call for Section 385 Rules Repeal

Business groups, such as the Business Roundtable and the Organization for International Investment, both urged Treasury to repeal the debt-equity rules.

Practitioners said those rules appear to be in the White House crosshairs.

John Harrington, a former Treasury international tax counsel who was in the government from 2001 to 2009, said the language used in the executive order targeting burdensome, complex regulations “certainly puts a bulls-eye on the 385 regulations.”

There may be a push in the administration “to manage that sooner rather than later,” according to Jeff Paravano, managing partner at Baker & Hostetler. “I would expect that to be at the top of that list.”

Phil West, chairman of Steptoe and Johnson LLP and a former Treasury international tax counsel, told Bloomberg BNA, “This EO is not surprising. It is highly likely that the resistance to the 385 regs has reached the new Treasury and White House. And I would think they would be very receptive to the message.”

Uncertainty Over Process

Apart from the political reaction, the process that the administration is requiring also drew a range of opinions.

Gregory F. Jenner, a partner at Stoel Rives LLP who served as both acting assistant secretary for tax policy and deputy assistant secretary for tax policy during the George W. Bush administration, said he believes the procedure “fundamentally misperceives what tax regulations are all about.”

He stressed that because tax regulations implement and interpret the law, they aren’t the same as regulations promulgated by other agencies. “Therefore, to pin on regulations the notion that they’re burdensome and costly is really looking in the wrong place,” he told Bloomberg BNA.


Mark Mazur, director of the Urban-Brookings Tax Policy Center, said he agrees with the concept of reviewing regulations, but said it’s a different picture now that the Treasury secretary has to devise recommendations in a specific time frame.

“Frankly, that’s kind of their job,” said Mazur, who served as assistant secretary for tax policy under Obama.

He said Treasury should be constantly reviewing regulations to determine if there are areas that are unclear, overly complex or too burdensome and need to be modified.

“I don’t think it’s qualitatively anything brand new,” he said. “I think the thing that’s a little new is it puts the Treasury secretary on the hook to come up with something. I don’t think Secretary Mnuchin can come back after a year” and have done nothing.

The question of what would be considered “significant” regulations under the new process is a big one.

Michael Desmond, a tax attorney and former Treasury tax legislative counsel during the Bush administration, said if the new executive order is referring to “significant regulatory action’’ as defined in Executive Order 12866 from 1993, then this new directive “could be fairly narrow.”

“The vast majority of regulations would not meet that definition,” he said.

One part that could trigger review and potential elimination under the new order is the clause in EO 12866 that says regulations are significant if they “have an annual effect on the economy of $100 million or more.”

However—at least with the way tax regulations are considered today—most regulations are strictly interpreting a statute so the economic impact would lie with the law itself, not the associated Treasury regulation.

It remains unclear whether the April 21 executive order would be strictly tied to EO 12866, although that EO was mentioned in the new document.

To contact the reporters on this story: Alison Bennett in Washington at and Allyson Versprille in Washington at

To contact the editor responsible for this story: Meg Shreve at

For More Information

Text of the administrative order is at

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