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Spotlight

Congressional tax leaders continued to voice their concern over the proposed Section 385 debt/equity regulations this week, in the lead-up to the expected finalization of the proposed rules. In a 22 August letter to Treasury Secretary Jack Lew, Finance Committee Chairman Orrin Hatch (R-UT) urged the Administration to re-propose the Section 385 regulations.

The Chairman said he is not per se opposed to the issuance of regulations under Section 385. Rather, he pointed to Treasury's "unprecedented speed" in moving forward with the proposed regulations which, he wrote, could lead to unintended consequences. Chairman Hatch also questioned whether Treasury had followed the necessary statutory and Executive Order requirements necessary to finalize the proposed rules.

Seven Republican Finance Committee members also wrote to Secretary Lew on 24 August, indicating their displeasure with the Administration's response to their queries about the proposed Section 385 regulations. The Committee Republicans wanted answers to specific questions and wrote that until the Committee has a full understanding of what reforms Treasury plans to make to the proposed rules, they had "a great deal of doubt" whether Treasury would take into account congressional lawmakers' concerns.

And on the House side, Ways and Means Committee Chairman Kevin Brady (R-TX), Tax Policy Subcommittee Chairman Charles Boustany (R-LA), and all other Committee Republican Members sent a second letter to Treasury Secretary Lew reiterating their strong concerns regarding the proposed Section 385 regulations. The letter focused on the regulations' adverse effects on American businesses, jobs, and the overall economy. The committee members suggested that at a minimum, "a complete overhaul of the current proposal would be necessary in order to ensure that any rules in this area appropriately target abusive tax-planning without interfering with normal business financing arrangements." The House tax writers added that the clear message from Treasury is the Administration's intention to finalize the regulations "swiftly."

In other news, Treasury this week released a White Paper on the European Commission's State aid investigations into transfer pricing rulings, outlining US concerns with the Commission's actions.

The report argues that the approach taken by the Commission in its investigations is new and was not foreseeable by the affected companies and EU member states. It further states that the Commission should not seek retroactive refunds, noting it creates a negative precedent for tax authorities around the world. The Treasury White Paper also contends that the Commission's State aid actions undermine US tax treaties as well as broadly-accepted international transfer pricing guidelines. It further takes the position that the Commission's investigations undercut consensus achieved as part of the OECD Base Erosion and Profit Shifting (BEPS) project.

In a blog statement released with the White Paper, Robert Stack, Treasury deputy assistant secretary (international tax affairs), noted that the Treasury Secretary and his staff had engaged extensively with the Commission in recent months to express US government concern over the EU State aid investigations.

The Irish government on 25 August announced a public consultation on the US-Ireland income tax treaty in line with ongoing discussions it said are taking place with the US to update the existing treaty. According to the Irish government, the OECD BEPS project and the new US model income tax treaty are the impetus for the treaty talks.

The OECD on 22 August published a discussion draft dealing with branch mismatch structures under BEPS Action 2 (Neutralizing the Effects of Hybrid Mismatch arrangements). The discussion draft follows the OECD's Action 2 report published in October 2015, which set out recommendations for domestic rules aimed at neutralizing tax mismatches arising under hybrid mismatch arrangements. The discussion draft applies the analysis and recommendations set out in the Action 2 Report to mismatches that can arise through the use of branch structures. The discussion draft identifies five basic types of branch mismatch arrangements.