Accounting

FEI Committees Call for Changes to Treasury Department’s Proposed Section 385 Rules


The Obama Administration’s proposed regulations to amend Section 385 of the Internal Revenue Code have engendered considerable debate and controversy since they were introduced in April as part of the Treasury Department’s initiative to address corporate inversions.

©Medioimages/Photodisc/THINKSTOCK

The proposed regulations, which would allow the IRS to determine whether a company’s debt obligations should be treated as debt or equity in order to prevent companies from stripping income out of the U.S. through loans to subsidiaries, have drawn strong opposition from the business community. FEI’s Committees on Taxation, Corporate Treasury and Corporate Reporting jointly submitted a comment letter to the IRS calling on the agency to rescind the proposed rule during the comment period that closed on July 7.

In its comment letter, the FEI Committees maintain that the proposed regulations are overly broad, noting that the vast amount of corporate debt  that would be recharacterized as equity under the new rules are not involved in earnings stripping. The proposed regulations would also impose onerous administrative, financial and tax burdens on American companies that do not have the ability to move earnings offshore.

While the FEI Committees call on the Treasury Department to withdraw the proposal, they offer a number of recommendations to ease the burdens the new rules would impose if the agency decides to move forward towards finalization. Among these is a suggestion to extend the effective date of the new rules to January 1, 2019 in order to give companies adequate time to prepare to comply effectively. FEI’s comment letter also calls on the Treasury Department to modify the proposal in a number of ways to reduce the impact on cash pooling and other treasury center activities, including creating an exemption for the debts of affiliates which meet the Foreign Account Tax Compliance Act’s  (FATCA) definition of a treasury center, distinguishing cash management debt from longer-term financing, and enacting an exception for working capital.

FEI’s comment letter also recommends a number of changes to the proposal to ease the documentation requirements the proposed regulations would impose on businesses. Among these are an exemption for ordinary course loans, creation of a safe-harbor exception to the proposal’s credit analysis documentation requirements, change the due date of documentation triggered by an EGI to the tax return due date, and allow for additional time to meet documentation requirements for new acquisitions.

The FEI Committee’s comment letter stresses that even with these and the other modifications it recommends, the proposed regulations create serious adverse tax consequences and substantial new compliance burdens for companies with U.S. tax-reporting obligations regardless of whether they are engaged in earnings-stripping activities.  These burdens are far out of proportion to the harm Treasury is trying to prevent.  The full text of FEI’s suggested changes to the Section 385 proposal can be found here.

FEI’s comment letter was one of nearly 200 received by the Treasury Department. The IRS will hear from interested parties during a public hearing on the proposed regulations today in Washington, DC.