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AICPA Urges Extension Of US Anti-Inversion Regs Consultation

by Mike Godfrey, Tax-News.com, Washington

08 June 2016


The American Institute of CPAs (AICPA) has called on the Treasury Department to extend the comment period on proposed new tax regulations intended to discourage US multinationals from undertaking "inversion" transactions.

Corporate inversions have been used by US companies as a means of moving away from the high American 35 percent corporate tax rate. A company that merges with an offshore counterpart can move its headquarters abroad, and take advantage of the lower corporate tax rates in a foreign jurisdiction as long as at least 20 percent of its shares are held by the foreign company's shareholders after the merger. However, much of the newly merged firm's management and operations may remain in the US.

The temporary regulations issued on April 4, 2016, seek to discourage inversions in two ways. First, the regulations attempt to limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of US companies under section 7874 of the Internal Revenue Code.

The second measure is far more controversial. It seeks to deter "earnings stripping," whereby US subsidiaries borrow from their new foreign parent company (or another foreign affiliate) to increase their interest payments, reduce their taxable income, and lower their exposure to US taxes, by recharacterizing certain debt instruments as equity under section 385 of the tax code.

In summary, the second measure treats as equity an instrument that might otherwise be considered debt if it is issued by a subsidiary to its foreign parent in a shareholder dividend distribution; addresses a similar dividend distribution of debt in which a US subsidiary borrows cash from a related company and pays a cash dividend distribution to its foreign parent; and treats a debt instrument as stock if it is "issued in connection with certain acquisitions of stock or assets from related corporations in transactions that are economically similar to a dividend distribution."

At present, comments on the proposed regulations are due by July 7, 2016, but the AICPA is of the view that much more time is needed for taxpayers and tax advisers to study the implications of the changes.

In a June 7 letter to the Treasury, Troy K Lewis, Chairman of the AICPA Tax Executive Committee, wrote: "AICPA believes the proposed regulations will have a much broader application and will have a significant and possibly disruptive impact on normal and critical operations of a large number of United States business entities. In addition, the changes proposed by the regulations are extensive, make changes to existing case law, and will require a substantial amount of study and review in order to provide comprehensive and meaningful comments."

Lewis added: "The AICPA also believes that the proposed regulations may result in significant unintended consequences that will impact non-abusive activities. For example, the AICPA is concerned about the possible effect of the regulations on a broad range of business transactions, including, but not limited to, standard cash-management techniques. As we further analyze the proposed regulations, we expect that we will uncover additional ordinary business transactions that are potentially impacted by them."

Lewis therefore urged the Treasury to extend the comment period "due to the significant changes proposed by the regulations and the significant impact to businesses."

TAGS: tax | business | interest | law | corporation tax | offshore | multinationals | tax rates | United States | regulation | Tax

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