In the midst of an administration that has been mired in legislative setbacks on both healthcare and tax reform (among various other “distractions”), President Trump has largely relied on the executive order to further his agenda thus far in Washington, D.C. While orders on U.S. immigration have garnered the most attention in the media, the “Executive Order on Identifying and Reducing Tax Regulatory Burdens” (the Order) was quietly executed in mid-April.
The Order tasked the U.S. Treasury Department with reviewing all “significant” tax regulations issued after January 1, 2016 and preparing an interim report within 60 days of the Order identifying all such regulations that:
1) Impose an undue financial burden on United States taxpayers;
2) Add undue complexity to the Federal tax laws; or
3) Exceed the statutory authority of the Internal Revenue Service.
Recently, the IRS released their “60-day interim report” in the form of Notice 2017-38 which will ultimately be followed up by a “150-day final report” suggesting specific actions to ameliorate the burdens created by the regulations identified in the interim report. The Notice identified eight regulations that were deemed to meet at least one of the first two criteria listed in the Order.
Of the eight regulations identified, our clients in the tech industry have been most keyed in on: 1) the final Section 385 regulations (dealing with debt versus equity determinations); and 2) the final Section 367 regulations (specific to the outbound transfer of foreign goodwill and going concern value). To a somewhat lesser extent, tech industry clients may also be concerned with the Section 987 regulations (foreign currency translation for Qualified Business Units) (see A&M’s recent Tax Advisor Weekly: Temporary Finality: The Current State of the Sec. 987 Regulations).
So, what might this mean for our friends in the tech industry? For one thing, those companies that have recently found their intercompany debt to be within the scope of the final Section 385 regulations may get a reprieve from the compliance burdens and/or the automatic recast (as stock) of intercompany indebtedness that would otherwise have been imposed by those regulations.
Additionally, while IP migrations have certainly slowed as techs companies look for more clarity on tax reform, it is certainly prudent for any company contemplating a transaction that may involve an outbound transfer of foreign goodwill and growing concern value to put the brakes on until at least September 18th (e.g., the date the final report will be due). For any outbound transfers that have already occurred, it is possible that the taxation of foreign goodwill and going concern value that would have been required by the Section 367 regulations will no longer apply.
And finally, for tech companies that have been studying the exceedingly complex regulations under Section 987 and designing a remedial plan for compliance, it may be worth postponing any further action until after the final report is released in September.
An interesting aspect of the Treasury’s self-assessment in Notice 2017-38 is that, contrary to numerous public comments on several sets of regulations issued during the relevant time period, the Treasury did not identify any regulations for which it lacked statutory authority (criterion 3 in the Order). Perhaps it was a little unrealistic to expect the Treasury to admit overstepping its authority (thereby potentially opening up other existing regulations to challenge and potentially limiting the Treasury’s authority in regard to future regulations).
Look for us to follow up on this article shortly after the Service issues its final report in September!
Author: Kenneth Dettman and Ken Brewer
We’d love to get your thoughts: Has your company endured an administrative burden under the Section 385 regulations that would alleviated if the regulations were repealed? Would the repeal of the new Section 367 regulations present any new opportunities for an outbound transfer? Please call or email us and let us know!