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Questions Raised Over US Debt-Equity Regs Finalization

by Mike Godfrey,,Washington

28 October 2016

On October 26, US Senator Dean Heller (R – Nevada) sent a letter to the Office of Management and Budget (OMB) Director Shaun Donovan expressing alarm that the agency took only eight working days to approve the complex final regulations under Section 385 of the US Internal Revenue Code.

The Treasury Department issued its final debt-equity regulations on October 13, 2016, shortly after it had forwarded them to the OMB for review on September 30.

Given the brief time that the regulations were with the OMB, Heller requested that its Office of Information and Regulatory Affairs (OIRA) should now make a number of internal documents public in compliance with disclosure and transparency requirements under Executive Order 12866, which states that "OIRA shall make available to the public all documents exchanged between OIRA and [an] agency during the review."

Heller wrote that he hoped Donovan "will adhere to this Executive Order and ensure that the public has the opportunity to review these documents, particularly given the potential impact these regulations could have on American businesses. At a minimum, the documents between your agency and the Treasury Department should be released to the public to understand whether your agency rubber-stamped the Treasury's suggestions on Section 385 or made substantial changes."

He looked forward to reviewing the documents and requested a response by November 9, 2016.

Prior to the issue of the final regulations, Republican lawmakers in both the Senate and the House of Representatives had expressed their concern that the US Administration planned to proceed "in haste" to finalize the regulations, which were issued in April this year as part of a larger proposed regulatory package aimed at curtailing corporate tax inversions.

Used by some US multinationals when merging with or being acquired by a foreign company, such inversions enable them to relocate their tax residence abroad, away from the high 35 percent US headline corporate tax rate.

Treasury's new rules are intended to limit earnings stripping following inversions, a practice whereby US subsidiaries borrow from their new foreign parent company (or another foreign affiliate), increase their interest payments, and reduce their US taxable income by using the interest expense deduction. The Internal Revenue Service would be allowed to re-characterize certain debt instruments as equity under Section 385.

TAGS: compliance | tax | business | tax compliance | law | mergers and acquisitions (M&A) | corporation tax | Internal Revenue Service (IRS) | ministry of finance | tax authority | multinationals | transfer pricing | United States | tax breaks | regulation

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