Close
Close

Republican tax writers press Treasury on debt and equity regulations

RFP
Tax Hot TopicsRepublican tax writers press Treasury on debt and equity regulationsThe top Republican tax writers in Congress last week renewed their efforts to pressure Treasury into backing down on the proposed regulations issued under Section 385.  

Treasury announced the proposed regulations in April in an attempt to deter inversions and certain earnings stripping transactions, but they have been heavily criticized for their negative effect on routine intercompany lending and financial transactions.

House Republican tax writers held a closed-door meeting with Treasury Secretary Jacob Lew last week, and House Ways and Means Chair Keven Brady, R-Texas, urged Lew to re-propose the rules before finalizing them. The meeting followed letters issued earlier by both Brady and Senate Finance Committee Chair Orrin Hatch, R-Utah, criticizing the rules.

Brady’s letter was signed by every Republican member of the committee and expressed “grave concern” that the broad scope of the proposed regulations would negatively affect U.S. business, damage the economy and interfere with job growth. The committee highlighted its doubts concerning the regulations purported compliance with the requirements of the Paperwork Reduction Act and asserted that refined estimates of the documentation burden may invoke the Congressional Review Act.

The Congressional Review Act empowers Congress to review and potentially overrule, by means of an expedited legislative process, a regulation that results in an annual effect on the economy of at least $100 million, a “major increase” in costs or prices for consumers or industries, or a “significant adverse effect” on competition, employment, investment, productivity, innovation or the ability of U.S. companies to compete with foreign businesses.  

The letter reinforced the committee’s ongoing message that more time is needed, and that the regulations should not be finalized without certain identified areas being addressed. The letter states, in part:

Overall, the joint Ways and Means and Finance Committee discussion with your tax policy team reinforced our view that, at a minimum, a complete overhaul of the current proposal would be necessary in order to ensure that any rules in this area appropriately target abusive tax-planning without interfering with normal business financing arrangements…the American people deserve a tax system that reflects accuracy and correct policy, not rules that are rushed out without proper vetting and consideration.

Hatch’s letter was sent on the same day and asked Treasury to re-propose the regulations in a “thoughtful, prudent and legal manner.” Hatch’s comments focused around the risks associated with Treasury’s swift actions to finalize the regulations, and expressed concerns that the regulations could lead to unintended consequences. Hatch further questioned whether Treasury, in issuing the proposed Section 385 regulations in the manner it did, violated various administrative procedural requirements or other executive order requirements. Hatch concludes in the letter:

I therefore ask you to re-propose the regulations. Complying with such request would not necessarily delay the regulations beyond this Administration, as time may still exist to re-propose with a 90-day comment period, with finalization during this Administration. It is worth noting that under the current congressional calendar the 115th Congress will already have a chance to disapprove of the measure under the [Congressional Review Act], even if you were to finalize the regulations in Augusts 2016, so there need not be a rush to finalize swiftly the regulations…

So far Lew has promised that Treasury is taking all substantive comments seriously and will make necessary changes, but has not backed off the pledge to finalize the rules before the end of the year. Neither Brady nor Hatch has committed to holding a hearing on the regulations.

Read Grant Thornton’s previous coverage of the proposed regulations under Section 385:
Proposed regulations threaten routine capitalization strategies and related-party lending transactions
Ways and Means Democrats press Treasury on debt/equity regulations
  
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.