US issues anti-inversion rules that include earnings-stripping provisions

The US tax authority, the Internal Revenue Service (IRS), issued a package of proposed and temporary regulations on Monday designed to reduce the tax benefits and incentives for corporate inversions. These new rules aim to curtail an inverted company’s ability to access foreign subsidiaries’ earnings without paying US tax. In a corporate inversion, a multinational company based in the US replaces its US parent with a foreign parent, usually in a lower-tax jurisdiction.

According to the US Treasury Department, the new rules make it more difficult for companies to invert by disregarding, for purposes of computing the ownership percentage when determining if an acquisition is treated as an inversion, foreign parent stock attributable to certain prior inversions or acquisitions of US companies. This is done under temporary regulations under Internal Revenue Code Secs. 304, 367, 956, 7701, and 7874. These rules are added to existing rules that had been issued in earlier IRS notices (Notices 2014-52 and 2015-79) and are now consolidated and formalised in T.D. 9761.

The new rules also address earnings stripping in proposed regulations targeting transactions that increase related-party debt that does not finance new investment in the US (REG-108060-15). These rules are the first rules the IRS has issued in many years attempting to distinguish between debt and equity.

According to the Treasury Department, the proposed regulations, issued under Sec. 385, address earnings stripping by:

• Targeting transactions that increase related-party debt that does not finance new investment in the US;
• Allowing the IRS on audit to divide a purported debt instrument into part debt and part stock; and
• Requiring documentation for members of large groups to include key information for debt-equity tax analysis.

—Sally P. Schreiber (sschreiber@aicpa.org) is a CGMA Magazine senior editor.