In separate letters, US House Ways and Means Committee Republicans and Democrats have expressed concerns about proposed tax regulations issued last April that recharacterize some cross-border loans made to related business entities as equity.
The proposed regulations, issued under section 385, are designed to curb corporate inversions by making interest stripping following an inversion uneconomical.
Echoing comments make by industry over the last few weeks, lawmakers on both sides of the aisle are now saying that the regulations appear to have unintended effects, reaching normal business transactions.
Eleven of the fifteen Ways and Means Committee Democrats, including ranking member Rep. Sander Levin of Michigan, signed on to a June 22 letter to Treasury Secretary Jack Lew urging Treasury to take a second look at the regulations.
While earnings stripping regs are needed to curb aggressive tax planning, Treasury should consider whether exceptions or special rules or transition rules are appropriate in limited circumstances, the Democrat members said.
“Business sectors such as financial services, insurance, and utilities may encounter industry-specific challenges to implementing these regulations due to various regulatory requirements unique to those industries,” they wrote.
They also expressed concern about the regs’ impact on internal cash management practices, such as cash pooling.
All 24 Republicans on the Ways and Means Committee followed up, signing a June 28 letter to Lew calling for the withdrawal of all sections of the tax regulations that significantly impact capital structuring or ordinary business transactions.
The Republican committee members also asked Treasury to extend the public comment period of the regulations, to conduct an economic analysis of the impact of the regulations, and to extend the effective date of the regulations until at least 90 days after the regulations become final. The regs are currently proposed to become effective for debt issued after April 4.
The regulations are too broad, creating “unacceptably high levels of uncertainty and adverse collateral consequences for non-tax motivated business activity,” the Republican lawmakers said.
They further maintain that section 385 of the tax code was not meant to police inversions or earnings stripping.
“We respectfully remind the Treasury that they have co-opted section 385 to use for purposes other than what Congress intended,” the lawmakers wrote.
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