Proposed Rules from U.S. Department of Treasury Could Harm Manufacturers
June 30, 2016
Proposed U.S. Treasury regulations, under Section 385 by the U.S. Treasury Department, would give the Internal Revenue Service (IRS) broad latitude to unilaterally treat a company’s related party debt as equity, overturning longstanding tax policy and well-established case law.
The proposal will result in new taxes on manufacturers by eliminating interest deductions and subjecting some dividend payments to withholding taxes. It threatens legitimate and well-established business practices, from corporate reorganizations to day-to-day cash management.
The proposal was released as part of a package of guidance designed to curb cross-border mergers (e.g., inversions). The broad regulations have little to do with this activity but will have a significant negative impact on a wide range of global and domestic manufacturers in the U.S. Both Republican and Democratic lawmakers have highlighted concerns with this proposal to Treasury Secretary Jack Lew.
The IRS proposal includes three parts:
- A Per-Se Rule:Debt is recharacterized as equity in specific intercompany transactions (the general rule) and when debt is used to fund specific distributions and acquisitions (the funding rule).
- A Bifurcation Rule: The IRS can treat an instrument as part debt and part equity.
- Documentation Requirements:Extensive documentation requirements apply when a debt instrument is issued and throughout the term of the debt.
Action you can take: NAM is circulating a survey to quantify the burdens created by these proposed regulations. You can help by answering this survey by tomnorrow, July 1.