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US Firms Brace For 'Major' Int'l Tax Challenges

by Mike Godfrey,, Washington

04 July 2016

Almost one-third of respondents (31 percent) to a recent KPMG poll said they believed the US Treasury's proposed debt-equity regulations would have more impact on their company's operations than the OECD's base erosion and profit shifting (BEPS) project.

Treasury's temporary regulations, issued on April 4, 2016, 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 instrument as equity under section 385 of the Internal Revenue Code. KPMG said that "the proposed rules would fundamentally alter the US tax treatment of intercompany financing within US and non-US parented multinational groups, … and force companies to reconsider aspects of their internal financing, cash management, and tax planning."

"Companies clearly recognize the major challenges that may lie ahead under the proposed rules, which represent the most profound regulatory change to the US income tax system in the last 20 years," said Joseph Pari, principal-in-charge of KPMG's Washington National Tax practice. "Taxpayers need to be preparing now for the potential for the new rules to take effect, with significant impact expected possibly as early as a matter of months from now."

In its US CEO Outlook 2016 survey, KPMG also found that the BEPS project "could prove very disruptive, adding uncertainty, and complicating the tax and business planning process at many organizations."

Jeff LeSage, KPMG's Vice Chair of Tax, said respondents said BEPS "will have a profound impact on how companies choose to structure themselves going forward. Companies would have to disclose far more about where they do business globally and where they pay taxes. This transparency is changing the nature of tax arbitrage, even for companies that have done proper and legal tax planning."

"Many companies are restructuring their global operations and looking at their supply chains, with a view to minimizing any potential brand or reputational risk," he added. "They don't want to deal with the potential fallout of negative publicity should a tax arrangement attract attention from media or shareholders."

TAGS: compliance | tax | business | tax compliance | law | ministry of finance | tax authority | multinationals | tax planning | transfer pricing | United States | regulation | Tax | BEPS

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