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Spotlight

Treasury and the IRS sent the final Section 385 debt/equity regulations to the White House Office of Information and Regulatory Affairs (OIRA) for review on 30 September. Although OIRA originally classified the regulations package as not economically significant — bringing forth all sorts of speculation — that was soon changed to economically significant, meaning the regulations are estimated will have an annual effect of $100 million or more on the US economy.

In response to this development, House Ways and Means Committee Republicans sent another letter to Treasury Secretary Jack Lew and Office of Management and Budget Director Shaun Donovan this week, urging the Administration not to "finalize the Section 385 regulations in haste." The letter writers also reiterated earlier comments that the revised debt/equity rules should be issued in proposed form. The letter further called on the Administration to make the rules effective only when issued in final form, and on a fully prospective basis.

A Treasury official was also quoted this week as saying Treasury is "close to issuing final [Section 385] regulations."

Treasury and IRS official fanned out over the last week to discuss the proposed regulations, but only offering hints as what the final package may look like. But a Treasury official did say the Administration does not see any conflict between the Proposed Section 385 regulations and the OECD Base Erosion and Profit Shifting (BEPS) project. The official said the proposed rules' recharacterization of certain related party debt as part debt and part equity are in line with OECD BEPS Action 4 (interest deductibility) and Action 2 (hybrid mismatches) in that they serve the same purpose.

A Treasury official this week also strongly criticized the EU State aid investigations. The official was quoted as saying that just because different rules apply to multinationals as opposed to purely domestic companies, that should not alone be sufficient for concluding that there is State aid. He also noted that Treasury is not able to determine, based on the facts, if the EU Commission is following the arm's length principle. But based on comments by EU officials, the Treasury official said, it appears the Commission is not applying the arm's length principle as reflected in tax treaties.

EY released the results of a new global tax survey at its 35th Annual International Tax Conference, "Unlocking the future" on 6 October, revealing increasing audits and more aggressive enforcement from tax authorities around the world. According to the survey, nearly a quarter (23%) of tax directors said that they are currently under audit in more than 15 countries, an increase of 6% from 2015 and 10% from 2014. In line with this, 72% of respondents said the enforcement posture and tactics of foreign tax authorities has become more aggressive, up from 66% in 2015.

The survey found that effects from the OECD BEPS project are also showing up in tax audits. Just under half (49%) of all respondents said they are currently seeing tax authorities raise audit issues that reflect BEPS focus areas, a jump of 16% year-over-year. And 60% selected transfer pricing as the top focus area being raised as an audit issue, with 54% saying it is also the top BEPS area affecting them through changes in law and reporting requirements. Click here to access the survey.