Treasury and IRS delay anti-inversion earnings-stripping documentation rules

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The Treasury Department and the Internal Revenue Service have delayed implementation of the Obama administration’s Section 385 documentation regulations for discouraging corporate tax inversions and earnings stripping until 2019.

In Notice 2017-36, the Treasury and the IRS said Friday they intend to amend Treas. Reg. § 1.385-2, also known as the “documentation regulations,” to apply only to interests issued or deemed issued on or after Jan. 1, 2019.

The amendment will have the effect of postponing application of the anti-inversion documentation regulations by 12 months. There may be further delays as well.

In the notice, the Treasury and the IRS are also asking for comments on whether the proposed delay would give taxpayers enough time to develop the necessary systems or processes to comply with the regulations. The documentation regulations relate to the documentation necessary to determine whether an interest in a corporation is treated as stock or indebtedness. The Treasury and the IRS said they have already received comments from numerous sources saying that the applicability date of the proposed regulations would not give them adequate time to develop the necessary systems or processes to comply with the documentation regulations.

There has been widespread concern about the Section 385 regulations after the IRS issued them in April of last year, with some practitioners warning the impact might be felt beyond just multinational companies moving their tax addresses abroad (see Proposed inversion rules cast a wide net). The American Institute of CPAs asked the Treasury and the IRS to delay the regulations last year (see AICPA urges Treasury and IRS to delay effective date of Section 385 proposed regulations).

However, at least one lawmaker in Congress was dismayed to hear of the delay. “Those corporations, who would renounce their citizenship in America to avoid paying their fair share for our national security and other vital public services, just received encouragement from President Trump to continue,” said Rep. Lloyd Doggett, D-Texas, the ranking Democrat on the House Ways and Means Tax Policy Subcommittee. “The modest Treasury rule from the Obama administration that Trump has now delayed is meant to stop tax dodging by companies like Pfizer, which attempted to claim Irish tax rates while charging American consumers twelve times the prices it charges the Irish for its most popular drugs. What a contradiction from Trump’s empty promises to stop American companies from moving offshore.”

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