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The United States Treasury Department and the Internal Revenue Service (IRS) have decided to delay by one year the application of documentation requirements under new regulations intended to discourage corporate inversions.
The regulations, which were finalized in October 2016, 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 regulations allow the IRS to re-characterize certain debt instruments as equity under Section 385 of the Internal Revenue Code.
In order to comply with the regulations, certain large corporations will have to undertake up-front due diligence and documentation with respect to the characterization of related-party financial instruments as debt. If these requirements are not met, instruments will be treated as equity for tax purposes.
However, the effective date of the documentation requirements has now been postponed by one year to January 1, 2019, in response to concerns from affected taxpayers that they were struggling to make the necessary changes to their systems and processes in time to comply with the original deadline.
"In response to the concern that taxpayers have continued to raise with the application of the Documentation Regulations to interests issued on or after January 1, 2018, and in light of further actions concerning the final and temporary regulations under section 385 in connection with the review of those regulations, the Treasury Department and the IRS have determined that these concerns warrant a delay in the application of the Documentation Regulations by 12 months," Notice 2017-36, issued by the Treasury and IRS on July 28, stated.
"Accordingly, the Treasury Department and the IRS intend to amend the Documentation Regulations to apply only to interests issued or deemed issued on or after January 1, 2019. Pending the issuance of those regulations, taxpayers may rely on the delay in application of the Documentation Regulations set forth in this notice," it added.
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