Tuesday, 25 October 2016

US House and Senate Lawmakers Urge Treasury to Rewrite Proposed 385 Debt/Equity Rules

The House Ways and Means Committee Republicans and Senate Finance Committee Chairman Orrin Hatch (R-Utah) have both issued formal letters to Treasury Secretary Jacob Lew with an appeal to rewrite and provide greater transparency into the controversial proposed rules on intercompany debt arrangements under Section 385.

Both letters, dated August 22nd, strongly criticize the Department of the Treasury for rushing the proposed regulation process and failing to follow basic protocol when reviewing proposed changes and commentary. In support of these claims, Senator Hatch noted that a hearing to discuss changes was scheduled merely a week after the commentary period had ended. Hatch commented, “[…] it is hard to see how the oral comments at the public hearing could be well understood if there was not adequate time to read and reflect upon the written comments beforehand. Given the thousands of pages of comments you have received in response to the proposed regulations, it is clear that the consideration of these comments should not be rushed”. Hatch then continued to cite that previous 501(r) regulations in June of 2012 were given approximately 72 days for commentary review.

Following this argument, Hatch continued that in the regulation review process, the Congressional Review Act (“CRA”) of 1996 has largely been ignored. The CRA states that a reasonable and detailed cost-benefit analysis should be given to the Office of Management and Budget’s Office of Information and Regulatory Affairs (“OIRA”) in order to determine the relative impact of a proposed regulation. The detailed analysis would then be disseminated to the public for review and transparency. Hatch criticized that the Department of the Treasury “[…] has long taken the position that tax regulations are exempt from these transparency requirements because of a secret agreement between the Treasury Department and the OIRA”. Hatch believes that the “Treasury’s special rule[s] work against the goals of transparency and accountability”.

The House Ways and Means Committee supported Hatch with similar comments about the proposed regulations. Specifically, the committee commented how the cost burden analysis that the Treasury provided had “woefully [understated] the actual compliance burden the documentation requirement would impose on affected businesses […]”. In the end, both tax-writers suggested increased time, dialogue, and coordination concerning the regulations. Both strongly believe that a more thorough analysis is necessary in order to forecast the potential effects of the proposed regulations on the U.S. economy. Secretary Lew did not issue any comments on the letters, nor is it known if any direct address will be given in the future.
  • The earnings-stripping regulations can be found here for further review.
  • The letter from Chairman Hatch can be found here.
  • The letter from the House Ways and Means Committee can be found here.
Source: Transfer Pricing Times: Volume XIII, Issue 7