updated 6:36 PM CET, Mar 18, 2023

Treasury in move to scale back Obama-era regs aimed at corporate tax avoidance via offshore

The U.S. Treasury Department  plans to scale back regulations that were brought in by President Obama as part of efforts to prevent American companies from shifting their profits overseas to avoid their U.S. tax obligations, guidance issued last week reveals.

The plan is likely to seem curious to many of the millions of Americans who live outside of the U.S. who have seen their lives become significantly more difficult as a result of U.S. government regulations – also brought in by President Obama – that were aimed at cracking down on American citizens who were making use of overseas banks and financial institutions to avoid U.S. taxes.

According to the new guidance, which may be viewed by clicking here, the regulations that have been earmarked for removal are seen as having been made unecessary by President Trump's 2017 Tax Cuts and Jobs Act (TCJA).

“The Tax Cuts and Jobs Act leveled the playing field for American businesses and finally allowed the U.S. to shift from a worldwide to a territorial system of taxation,” Treasury Secretary Steve Mnuchin said, in a statement on the Treasury's website.

“Because tax cuts made our business environment more competitive, we are now able to remove regulatory burdens that have been rendered obsolete, further reduce costs for job creators and hardworking Americans, and protect the U.S. tax base.

Comments on the proposed rule changes, formally titled "The Treatment of Certain Interests in Corporations as Stock or Indebtedness", are being accepted by Treasury officials until Feb. 3. 

'Change in policy'  

The proposed changes are being seen as representing a change in U.S. tax policy, which in recent years has seen U.S. lawmakers looking to impose greater regulations on U.S. companies in an effort to prevent them from using their overseas operations to  avoiding U.S. tax.

The regulations that the Treasury is seeking to change are complex, as are the proposed changes. They focus on something called the "Distribution Regulations' general rule, under which, as the document proposing the changes explains, "the issuance of a debt instrument by a member of an expanded group to another member of the same expanded group in a distribution, or an economically similar transaction, may result in the treatment of the debt instrument as stock." 

The Distribution Regulations' rule in question is designed to discourage U.S. corporations from shifting income to their overseas affiliates and then borrowing it back, and lowering their U.S. tax bills by deducting the interest they pay for the loan of this money. 

While acknowledging that the Distribution Regulations "continue to be necessary at this time" to avoid restoring "incentives for multi-national corporations to generate additional interest deductions without new investment", the document goes on to note that the Treasury and IRS are seeking to "modify" these reguations in certain ways, and explains how this is being proposed to be done. 

With respect to comments, the Treasury Department and IRS are said to be seeking input on "on all aspects of the rules" described in the relevant section of the proposed rule change document, with particular focus on what the deemed "appropriate standard for determining the existence of a connection between a debt instrument and a distribution or economically similar transaction under the funding rule" should be. 

"The Treasury Department and the IRS also request comments on whether the proposed regulations should include particular factors that indicate when the funding rule applies, and factors that indicate when the funding rule does not apply.

"The Treasury Department and the IRS also request comments on what additional guidance, if any, should be issued (or which provisions should be eliminated fro the final regulations) to reduce the compliance burden associated with the Distribution Regulations.

"The Treasury Department and the IRS also request comments on how the Distribution regulations may affect small businesses."