U.S. Treasury Targets Eight Tax Regulations for Possible Changes -- Update

By Richard Rubin Features Dow Jones Newswires

The U.S. Treasury Department plans to alter part of the Obama administration's high-profile attempt to stem cross-border corporate tax avoidance. The move, announced Friday, is part of the Trump administration's effort to reduce the government's burden on businesses and taxpayers.

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A rule limiting the tax benefits of intercompany loans was among the Obama administration's most controversial and tax experts had expected it to appear on Treasury's target list. Changes to that rule and seven others appeared on a list released by the Internal Revenue Service in response to an April executive order from President Donald Trump.

Friday's notice doesn't change the regulations or indicate how significant the changes might be. It seeks comments from the public by Aug. 7 and asks whether and how the rules should be "rescinded or modified."

"Treasury intends to propose reforms -- potentially ranging from streamlining problematic rule provisions to full repeal -- to mitigate the burdens of these regulations in a final report submitted to the president," Friday's notice said. That final report is due by Sept. 18.

The debt regulations were part of the Obama administration's attempt to address inversions, the corporate technique of putting a headquarters address outside a country. The rules, under Section 385 of the tax code, made it harder for companies to engage in the practice known as earnings stripping, in which they load up the U.S. operations with debt and reduce U.S. taxes. The rules affect other companies, including foreign-headquartered firms that aren't inverted U.S. businesses.

"The whole idea of the 385 rules were, if you're going to do intercompany loans, you should have a real bona fide loan," said Mark Mazur, who spearheaded the regulatory effort as the Obama Treasury Department's top tax policy official.

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The announcement about the debt rules is "a positive signal that this administration is focused on growth," said Nancy McLernon, president of the Organization for International Investment, a trade group that represents foreign-headquartered companies. She said Treasury should immediately delay implementation during the review.

Rep. Lloyd Doggett (D., Texas), said the intercompany-debt regulations were a "modest measure" that would prevent billions in corporate-tax avoidance.

"This may be just another example of the overall Trump approach -- 'If Obama did it, undo it," Mr. Doggett said. "We should be doing more to prevent big multinational tax dodgers from avoiding their fair share of our national security and other vital public services, not less."

Other changes to limit inversions weren't included on Friday's list. Those may remain in place, along with dozens of other tax regulations from 2016 and 2017.

"There aren't that many on the list, so that's kind of a sense that people think they got it about right," Mr. Mazur said.

Treasury's list included two rules that have been proposed but haven't taken effect yet: changes to how assets are valued for gift and estate-tax purposes and new definitions for what entities can issue tax-exempt bonds. Rules that haven't yet taken effect are relatively easy to withdraw.

Another rule on Treasury's target list made it harder for U.S. companies to transfer certain assets to foreign corporations, where they can defer U.S. taxation until they bring income home. Before those rules took effect, companies had more ability to make transfers of intellectual property while making them partially tax-free by attributing some of the value to foreign goodwill.

Business groups have been urging the administration to repeal or change several of these rules. Seven of the eight rules appear on a list that the U.S. Chamber of Commerce sent the government in May.

These rules "are some of the most burdensome to the business community, and we applaud Treasury's recognition for the need for action on them," said Caroline Harris, the chamber's vice president of tax policy.

Another rule up for revision or repeal allows the IRS to have outside attorneys question witnesses during audits. That has become an issue in a tax dispute between the government and Microsoft Corp. Company spokespeople didn't immediately respond to a request for comment.

Write to Richard Rubin at richard.rubin@wsj.com

(END) Dow Jones Newswires

July 07, 2017 17:48 ET (21:48 GMT)