As published on bloomberg.com, Thursday October 31, 2019.
The Treasury Department plans to weaken regulations championed by President Barack Obama that were intended to prevent U.S. companies from moving profits offshore to avoid taxes, according to guidance released Oct. 31.
The instructions mark a change in U.S. tax policy that has in recent years focused on imposing stricter rules on American corporations using complex transactions to move money overseas to skirt taxes. The Treasury Department said the regulations, implemented in the final months of Obama’s administration, are no longer necessary because of the 2017 tax law enacted under President Donald Trump.
“Because tax cuts made our business environment more competitive, we are now able to remove regulatory burdens that have been rendered obsolete, further reduce costs for job creators and hardworking Americans, and protect the U.S. tax base,” Treasury Secretary Steven T. Mnuchin said in a statement.
Treasury’s regulations address rules preventing American firms from lowering their U.S. tax bills by shifting income to offshore related companies, loaning that money back to their domestic companies, and then deducting the interest off their Internal Revenue Service bills.
A senior Treasury official on a call with reporters Oct. 31 said the agency intends to repeal a part of the rules that automatically re-characterize tax-deductible loans as taxable stock if a U.S. company is receiving loans from and distributing cash to a foreign branch within a 72-month window. It issued an advance notice of proposed rulemaking discussing the repeal.
The rule made it more likely companies would face higher tax bills as they moved money in and out of the country. Treasury plans to replace it with a standard that is more specific and gets rid of some complex exceptions, the official said.
The new rule would give companies some leeway to prove that two transactions aren’t related and don’t deserve adverse tax consequences.
Businesses resisted the original rules, published in 2016, arguing that the IRS was overstepping its authority. The regulations, commonly called tax code Section 385 rules, were some of the most controversial tax rules ever written at the time, prompting companies to send thousands of letters to the IRS in opposition.
Replacing a test that was solely based on timing with a more fact-specific test will make it harder for the IRS to enforce the 385 regulations, said Mark Mazur, who was the assistant secretary for tax policy at Treasury in the Obama administration when the initial rules were issued.
“It’s not like the IRS knows more about the workings of the firm than the firm does,” he added. “So there’s an information asymmetry that creates a disadvantage.”
Treasury will also eliminate requirements for businesses to report their inter-company loans to the IRS, a change the agency had previously proposed. It issued final rules removing the requirements.
The moves could make it easier for firms to use accounting tactics to minimize their U.S. earnings and inflate their foreign profits, which are frequently taxed at rates lower than the current 21% domestic corporate levy. The existing regulations were aimed at stopping American companies from moving their headquarters to a lower-tax country, a process known as a corporate inversion.