Key International Tax Regulations Remain in Limbo after Rollback
The Treasury Department repealed almost 300 tax regulations in mid-March 2019.
Both the March 2019 repeal—titled the Eliminating Unnecessary Tax Regulations rule—and other international tax provisions being examined for modification come from the same federal tax simplification initiative. However, international businesses will continue to wait on further guidance related to Section 385 debt/equity provisions, and transfers of goodwill to a foreign corporation.
In April 2017, President Trump issued an executive order directing the Treasury Department and the IRS to review all tax regulations updated on or after Jan. 1, 2016. As part of the review, regulators had to identify which requirements were unnecessarily cumbersome, imposed an undue financial burden on taxpayers, or exceeded the authority of the IRS.
The Treasury Department had issued a short list of significant regulations that met the review criteria. Three international business provisions landed on that list: Section 385 provisions, foreign currency gains or losses, and transfers of goodwill to a foreign corporation.
In the same executive order, President Trump called for a simplification of the federal tax system. It is this part of the executive order that led to the Eliminating Unnecessary Tax Regulations rule, according to the background to the rule published in the Federal Register on March 14, 2019. The background to the rule change also stated that the origins of the clean-up project came from an earlier executive order called Enforcing the Regulatory Reform Agenda.
What Was Included in the Regulation Rollback?
Eliminating Unnecessary Tax Regulations includes 296 provisions that were deemed to be unnecessary, duplicative or obsolete—i.e., deadwood. Changes under the rollback affect specific considerations related to – among other provisions – income tax for deferred compensation and foreclosed property by a real estate investment trust (REIT), estate tax situations, employment tax situations, and certain excise taxes.
Two international tax provisions had been flagged as deadwood in proposed regulations but were removed from the final Eliminating Unnecessary Tax Regulations rules. These provisions related to international sales corporations and foreign sales corporations. The IRS and the Treasury said they were not included in the final rule because they play an important role in other tax provisions.
In a conference that preceded release of the Eliminating Unnecessary Tax Regulations rule, Treasury Assistant Secretary for Tax Policy David Kautter said that several regulations are still on the table to be either amended or withdrawn. These include the Section 385 debt/equity rules, provisions related to transfers of goodwill to a foreign corporation, and the treatment of partnership liabilities under Section 707.
In addition, the IRS published final and temporary regulations regarding foreign currency gains and losses under Section 987 in December 2016, but the provision was flagged for further review by the Eliminating Unnecessary Tax Regulations executive order. In IRS Notice 2018-57, regulators announced that taxpayers can apply the final regulations and related temporary regulations for the first taxable year that begins three years following the Dec. 7, 2016 effective date. For taxpayers with a calendar tax year, that means the final regulations for Section 987 can be applied for taxable years beginning on or after Jan. 1, 2020. A few additional changes were also identified by the Treasury to make the transition to the final regulations easier, including an alternative transition rule and alternative loss recognition timing limitations.
The rollback of the deadwood regulations indicates that the Treasury Department and the IRS are continuing their simplification of the federal tax code. Additional changes to the international tax provisions may be coming soon.
For a deeper look into those international tax provisions being targeted, please see our earlier publication, Executive Order May Reduce U.S. International Tax Burdens.
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