In what may be described as the tax rule change of the century—or not, if the US Treasury and IRS heed the thousands of pages of comments received—the final form of Section 385 rule changes to clarify Debt-Equity characterizations and curb earnings stripping via intercompany loans has multinational corporates and their international tax advisors on edge.
Presenting at NeuGroup treasurer meetings last week, both Pam Olson, Washington National Tax Services Leader at PwC, and Peter Connors, a tax law Partner with Orrick, Herrington & Sutcliffe LLP, suggested that December was the most likely timeframe to see final rules (after the election and during the lame duck Congressional session, since politically, they are a hot potato now). They did acknowledge that an earlier release of the final rules was very possible, however, pointing to speculation that they may come out ahead of important tax professionals’ meetings taking place over the next few weeks.
NeuGroup member tax teams also informed us last week that well-substantiated rumors were circulating that the final rules were dropping before mid-month. Anticipation further heightened when, last Friday, the 385 regulations were posted on the Office of Management and Budget’s (OMB) Office of Information and Regulatory Affairs (OIRA) website as under review. The website listed the regulations as “final,” which generally means the regulations are complete from the US Treasury’s/IRS’s perspective but are subject to OIRA review. The OIRA review can result in a call for further revisions.
OIRA review is limited to 90 days, but it can be faster (the average is said to be around 53 days). Nobody in an official government capacity is saying much about the timing, so there is still a guessing game going on. However, it feels like the rules may be coming out and made effective sooner rather than later.
Relief taken away in a snafu
Originally, the OIRA website listed the review as not being economically significant and having no international impact. This prompted huge relief on the part of international tax advisors. For example, as noted in this client brief from EY:
<<Importantly, the description of the final regulations states that they are not economically significant and that they have no international impact. This is different from the description of the proposed regulations, which stated that the proposed regulations were “major,” were “economically significant,” and that they “will be likely to have international trade and investment effects, or otherwise be of international interest.”
Such a change would have meant that the final rules would have been revised substantially from those proposed last April and that their impact had been greatly narrowed. “Not economically significant means that they will have less than a $100mn revenue impact on the economy,” according to Mr. Connors.
Unfortunately, as Bloomberg BNA reported on Tuesday, the characterization was swiftly changed without comment, leading most to speculate that the poster simply made an error and checked the wrong box. All the sighs of relief have gone away with the snafu fix, but there is still plenty of optimism that the rules will be altered to significantly narrow their impact.
They better be, because the final rules are also rumored to be made effective 90 days after filing. As Ms. Olson emphasized with our members last week, many of the comment letters pointed out in detail that without major changes, it would be nearly impossible for firms to comply in a 90-day timeframe.
Such an OIRA review of tax regulations is also a bit out of the ordinary. When it happens, it usually means the regulation is something controversial, although it still could be swiftly approved if Treasury has addressed all public comments. This helps fuel rumors that the US government took the comments it received very seriously and is doing something much simpler and less impactful than what was originally proposed. We shall see.