On October 13, 2016, the Treasury and IRS issued regulations [T.D. 9790 (Oct. 13, 2016)] finalizing and revising proposed regulations issued earlier in the year that targeted post-inversion earnings strippings transactions, which are certain related-party debt transactions that inverting companies engage in post-inversion to lower their tax liability.
The issuance of the proposed regulations in April was received with a significant amount of commentary from corporations, banks, and tax practitioners, and the new set of final, temporary, and proposed regulations reflect the Treasury and IRS’s efforts to address the comments and concerns. As quoted in the Treasury Department’s press release announcing the new set of regulations [See “Treasury [sic] Issues Final Earning Stripping Regulations to Narrowly Target Corporate Transactions That Erode U.S. Tax Base,” U.S. Department of the Treasury Press Center (Oct. 13, 2016), which can be found at https://www.treasury.gov/press-center/press-releases/Pages/jl0580.aspx], Secretary Jacob Lew stated with respect to the comments:
Today’s final regulations are an important step in addressing earnings stripping, a commonly used technique to minimize taxes after an inversion. Throughout our rulemaking process, we sought comments to help narrow the rule and avoid any unintended consequences. We engaged extensively with businesses, tax experts, the public, and lawmakers and carefully considered their comments and recommendations. As a result of this process, the final rule effectively addresses stakeholder concerns by more narrowly focusing the regulations on aggressive tax avoidance tactics and providing certain limited exemptions.
The new set of regulations adopt many of the provisions of the proposed regulations, which set forth rules establishing certain threshold documentation requirements that corporations have to satisfy in order for certain related-party interests in a corporation to qualify as debt for federal tax purposes. [Proposed regulations, 81 FR 20912 (April 8, 2016]. The required documentation enables the IRS Commissioner to determine whether interests are debt or stock pursuant to the Commissioner’s authority under IRC Section 385. [Proposed regulations, 81 FR 20912 (April 8, 2016]. In addition to adopting as final many of the rules in the proposed regulations, the new set of regulations also modify many of the provisions of the proposed regulations. The preamble to the new set of regulations summarizes these changes, and below are some of the major changes highlighted in the preamble:
Additional modifications in response to the numerous comments on the proposed regulations are found in the final and temporary regulations, and the changes (and the significant length of the regulations themselves) evidence the Treasury’s careful study and consideration of the concerns of affected taxpayers and others in the tax community. From a policy perspective, the new set of regulations demonstrates the Treasury and IRS’s continued efforts to curb corporate inversions and, as expressed by Secretary Lew, “to protect the tax base from continued erosion”. [See “Treasury [sic] Issues Final Earning Stripping Regulations to Narrowly Target Corporate Transactions That Erode U.S. Tax Base,” U.S. Department of the Treasury Press Center (Oct. 13, 2016), which can be found at https://www.treasury.gov/press-center/press-releases/Pages/jl0580.aspx]. Considering the robust response to the proposed regulations issued in April, it will be interesting to see how the new regulations will be received.