Photographer: Andrew Harrer/Bloomberg

Tax Rule Aimed at Corporate ‘Earnings Stripping’ Under Review

  • Obama-administration regulation drew criticism as overbroad
  • Trump ordered review of tax rules that may pose undue burdens

A federal rule aimed at limiting corporate “earnings stripping’’ for tax-avoidance purposes may pose an undue burden on taxpayers and may be changed or rescinded, according to a U.S. Internal Revenue Service notice.

The notice, published Friday afternoon, cites seven other tax-related regulations that will be subjected to additional scrutiny and possible changes later this year, including a controversial measure designed to prevent deep discounts in the valuation of estates for tax purposes.

President Donald Trump in April ordered the U.S. Treasury Department to review federal tax regulations issued after Jan. 1, 2016. The review would target “things that are significant and create complexity and undue burdens,’’ Treasury Secretary Steven Mnuchin said at the time.

One rule that surfaced in that review was an Obama-administration regulation aimed at curbing companies’ offshore profit-shifting through intra-company loans. Such “earnings stripping” involves loans among corporate subsidiaries in different tax jurisdictions -- a strategy that often results in tax-deductible interest payments for the U.S. units and interest-income streams for affiliates in lower-tax countries.

The regulation drew particular criticism from international tax lawyers and multinational corporations, which argued that it went too far by imperiling ordinary business transactions. Officials scaled back the rule before finalizing it last October.

That softening exempted corporate cash pools, short-term loans and acquisitions of stock related to employee compensation plans. It also extended by one year the date by which companies would have to comply with new documentation rules, to Jan. 1, 2018.

Estate Values

The proposed rule governing valuations of estates for tax purposes has been equally controversial among estate planners. Critics say it would increase estate valuations and transfer tax bills by eliminating or restricting common discounts, such as those available for minority stakes in a business enterprise or for lack of marketability of particular assets. Others complained that the rules would make some valuations “more difficult,” according to the IRS notice.

The federal estate tax is assessed at a 40 percent rate on any portion of an estate worth more than $5.49 million for an individual or $10.98 million for a married couple.

According to the notice, the Treasury Department will seek public comments until Aug. 7 on whether those regulations and six others should be rescinded or changed. It says a final report on the regulations is due from Mnuchin to Trump by Sept. 18.

The notice also targets regulations that:

  • Tighten up the requirements on what can qualify as a “political subdivision” that can issue tax-exempt bonds. That proposal had sought to make tax-exempt bond issuers meet requirements in three areas concerning “sovereign powers, governmental purpose and government control.”
  • Limit the ways companies calculate gains or losses on foreign currency translations through certain foreign subsidiaries or other related foreign entities for tax purposes.
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