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Spotlight

US Treasury officials this week offered more insight into the recently issued final and temporary Section 385 debt/equity regulations. Addressing the final rules' documentation requirement which imposes a reasonable expectation that the parties can repay the debt, a Treasury official said that means the taxpayers will need to prove they can repay the entire principal amount.

The official was quoted as saying that the ability to repay (and also proving the ability to repay by being able to refinance) is subject to a reasonableness standard, which may not be the same for all issuers. He said that the issuer's "relevant financial ratios" relative to industry averages may be useful, but suggested that that may not be enough. Other acceptable forms of documentation include "cash flow projections, financial statements, business forecasts, relevant financial ratios, and other information related to sources of funds," he said.

In respect to cash pooling, the official was quoted as saying the documentation requirements for financial instruments issued in cash pooling are simpler. He said Treasury will not require "documentation as between depositors and borrowers" in a notional cash pool. Instead, the official indicated an annual credit analysis of all the pool borrowers would be treated as an expanded group instrument issued directly among the expanded group members.

As to or what to expect in the future — recall Treasury reserved in respect to several areas in the final and temporary regulations — another senior Treasury official said the US government remains concerned about debt issued by foreign issuers, i.e., controlled foreign corporations. She indicated that taxpayers should not expect guidance in those areas anytime soon, however, and that it will be left to the next Administration to decide. If the government moves to issue guidance in respect to foreign issuers, she said, those rules will be prospective. Treasury apparently will also take a long hard look at the bifurcation of debt issue before deciding what to do in that area, as well.

In FATCA news, an IRS official said that the "actual knowledge" standard for withholding agents to certify the applicability of treaty limitation on benefits on the new Form W-8BEN-E does not require additional analysis or research. The official also was quoted as saying the form will not have to be used by withholding agents until 1 January 2017, and not 1 November 2016.

And, an IRS official this week said that taxpayers should expect a regulation package with a transition notice for the Section 871(m) dividend equivalent payment and withholding rules, but not before mid-November. The official said the rules will apply to "delta one contracts in 2017, but for all other contracts in 2018." The transition notice reportedly will have a more relaxed combination rule and will address the qualified derivative dealer (QDD) rules.

In a major EU development, the European Commission on 25 October announced a new package of corporate tax reforms. The package includes three separate legislative initiatives: (i) a two-stage proposal towards a Common Consolidated Corporate Tax Base (CCCTB) (see Tax Alert 2016-1819); (ii) a Directive on Double Taxation Dispute Resolution Mechanisms in the EU (see Tax Alert 2016-1820); and (iii) amendments to the Anti-Tax Avoidance Directive (ATAD) agreed to in June 2016, as regards to hybrid mismatches with third countries. The package also contains a Chapeau Communication, outlining the political and economic rationale behind the proposals, as well as impact assessments on the CCCTB and the dispute resolution mechanism (see Tax Alert 2016-1821).

The Commission recognized that elements of the original CCCTB proposals released in 2011 gave rise to difficult debates and consequently proposed the staged approach. The proposal has been split into two directives, the first covering only a common corporate tax base (CCTB) and the second introducing the consolidation elements of the CCCTB itself.

The legislative proposals next will be submitted to the European Parliament for consultation and to the Council of the European Union for adoption. All Member States will have to sign up to this proposal before it can be adopted, and each Member State would then need to incorporate it into their national law. A Global Tax Alert provides details.