The proposed Internal Revenue Code Section 385 regulations released in April were a primary focus of recent meetings of international tax practitioners and government officials. At various sessions of the American Bar Association Section of Taxation meeting on 6-7 May (May ABA meetings), Treasury and Internal Revenue Service (IRS) officials participating in panels discussing the regulations noted that the government is willing to consider narrowing the defintion of expanded group, providing relief for common intragroup transactions, and including exceptions for group cash management and bank regulatory capital. They emphasized that the rules are not intended to disrupt capital markets, pertaining instead to related party instruments. At the Practising Law Institute Conference on partnership tax planning on 12 May, practitioners noted that the regulations' aggregate approach to partnerships could cause unintended consequences. IRS attorneys stated that the IRS is open to providing additional clarity, and requested comments. At both meetings, Treasury and IRS officials reiterated the intention to finalize the proposed rules as a large single package soon.

The proposed regulations under Section 305(c) were also discussed at the May ABA meetings. The proposed regulations address the timing and the amount of deemed distributions for conversion ratio adjustments on convertible debt. Noting that taxpayers and withholding agents would like for the IRS to provide guidance addressing prior years for which there was no withholding on deemed dividend distributions, a Treasury official indicated that it would be reasonable for taxpayers to make accounting method adjustments.

At the May ABA meetings, Treasury officials also commented on the most recent US model treaty. Overall, they described the new model treaty as aimed at curbing the perceived abusive use of tax treaties in international tax avoidances plans. According to the Treasury officials, certain treaty partners appear to have faciliated those structures, whether intentionally or unintentionally. The new model treaty includes provisions that provide a definition for "special tax regimes" and limit treaty benefits in those situations. Appropriately defining a permanent establishment and attributing profit are important considerations for the Treasury. The officials also noted that it is key that countries make these assessments in a consistent manner. Treasury officials have opposed the new standard in the Organisation for Economic Co-operation and Development's (OECD's) report on Action 7 (preventing artificial avoidance of permanent establishment status) of the base erosion and profit-shifting (BEPS) project. They noted that although it appears that the new standard may create more permanent establishments, it does not mean that it will result in more attributed profit.

In other news, members of the House Ways and Means Tax Policy Subcommittee held a hearing on 12 May, to discuss ideas for broader tax reform. Committee members noted that they intend to put forth a proposal that would make the US tax system more competitive. Chairman Charles Boustany discussed the need to protect US companies impacted by the country-by-country reporting provisions under the OECD BEPS project. Various other topics, including a possible consumption tax, energy credits and R&D credits, were also discussed.

Senate Finance Committee Chairman Orrin Hatch will hold a hearing on 17 May to discuss corporate integration. Hatch remarked that corporate integration could eliminate the distortive double taxation of corporate earnings and modernize the tax code. A senior aide to the committee also noted that a corporate integration plan from the committee will include a macroeconomic analysis. Hatch's aides have revealed some of the plan's provisions, including a nonrefundable withholding tax rate of 35% on both interest payments and dividends. The committee is expected to host a second hearing on corporate integration, which is yet to be scheduled.