Treasury’s plan to fix to US debt-equity tax regs falls short, GOP lawmakers say

US Treasury’s plan to revise six problematic areas in the proposed section 385 debt-equity regulations does not go far enough to allay concerns about regs’ negative impact on the US economy, Republican lawmakers said today in a letter to Treasury Secretary Jacob Lew.

The proposed regulations, issued last April, would recharacterize some multinational corporation related-party debt as equity in an effort to curtail inversions. Critics charge, though, that the regs reach many ordinary transactions undertaken by companies not involved in inversions. 

According to the letter, signed by all 24 Republican House Ways and Means Committee members, Treasury officials during an July 6 meeting acknowledged that the proposed section 385 regs have unintended effects.

The lawmakers said that Treasury agreed to address these problems in the final regulations by:

  • Providing an exclusion for cash pooling arrangements;
  • Providing exceptions for broader cash management practices including currency and interest-rate hedging;
  • Eliminating any adverse impact on S corporation and REIT status;
  • Providing exceptions for equity compensation;
  • Extending the consolidated group exception to industries such as insurance for which consolidation is restricted; and
  • Providing exceptions for regulated industries that are subject to capital and debt requirements.

According to the lawmakers, though, while the commitment is a positive step, Treasury has not gone far enough, and should abandon its plan to quickly finalize the regulations with these modifications.

The committee members said that affected stakeholders should be allowed comment on any recrafted rules before they are final.

“These areas are all complex and it is not clear that your tax policy team has identified specific solutions that would appropriately and fully resolve these fundamental problems with the proposed regulations,” the lawmakers said.

Further, the committee members said that Treasury should commit to addressing additional problems in the regs, including the treatment of longer-term cash and financial management arrangements and transactions, the implications for foreign-to-foreign transactions, the effect on transactions involving partnerships and disregarded entities, and the compliance burden of the documentation requirements.

“Ultimately, if the proposed regulations are not completely overhauled, they would damage our economy, increase the barriers to investment for American businesses and innovators, and interfere with the growth of the good paying jobs American workers need and deserve,” the authors conclude.

In a separate letter to Lew, also released today, Senate Finance Committee Chairman Orrin Hatch (R., Utah) expressed concern that Treasury was moving to quickly to finalize the regulations.

Hatch also said the section 385 regulations should be submitted to the Office of Management and Budget’s Office of Information and Regulatory Affairs for a determination as to whether they are a major rule within the meaning of the Congressional Review Act.  Treasury has maintained that tax regulations are exempt from these requirements.

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