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Senate GOP Add To Anti-Inversion Regs Opposition

by Mike Godfrey, Tax-News.com, Washington

07 July 2016


Seven Republican members of the US Senate Finance Committee have written to Treasury Secretary Jack Lew adding their voices to those of other lawmakers and businesses who have urged modifications to the proposed debt-equity regulations and an extension to their comment period.

Although the US Treasury Department has appeared to resist all such moves to date, Senator Dean Heller (R – Nevada) and his colleagues stressed in their letter that they are "deeply concerned" by the proposed regulations.

Treasury's temporary regulations seek to discourage corporate tax inversions by deterring "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. The regulations would allow the Internal Revenue Service to re-characterize certain debt instruments as equity under section 385 of the Internal Revenue Code.

In their letter, the Republican Senators urge Treasury to extend the July 7 comment period deadline to at least October 5, 2016; consider the comments and feedback it receives through the extended comment period; and change the effective date for the rules so that they would apply to debt instruments issued, or deemed issued, no sooner than 90 days after the date the regulations are issued in final form (not from April 4, when they were originally issued).

They also ask that Treasury should ensure, for example, that S corporations do not lose their tax status through having debt re-characterized as equity, and are not penalized for their domestic-to-domestic transactions; and that non-tax motivated cash management techniques, such as cash pooling or revolving credit arrangements, are exempted.

In addition, foreign-to-foreign transactions should be exempted from the scope of the proposed regulations; and the USD50m intercompany debt threshold should be expanded so that more small businesses will be exempt from the rules.

"While we share your concern regarding erosion of the US tax base," the Republican Senators wrote, "the proposed regulations are far broader than the types of cross-border transactions associated with earnings stripping. … The proposed section 385 regulations represent a fundamental shift in how debt and equity are characterized, with far-reaching implications for a wide range of American businesses."

"Far from the stated intent of addressing abusive tax transactions," they added, "we are concerned that the actual effect of these regulations will be to drive investment and capital outside of America's borders, further eroding the US tax base. In our view, creating obstacles to job creation and impeding economic growth should not be the outcome of any proposed Treasury regulations."

TAGS: compliance | tax | investment | small business | business | tax compliance | law | corporation tax | ministry of finance | treasury management | multinationals | transfer pricing | United States | regulation | business investment

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