The top Republican tax writers in Congress last week renewed their efforts to pressure Treasury into backing down on the proposed regulations issued under Section 385.
Treasury announced the proposed regulations in April in an attempt to deter inversions and certain earnings stripping transactions, but they have been heavily criticized for their negative effect on routine intercompany lending and financial transactions.
House Republican tax writers held a closed-door meeting with Treasury Secretary Jacob Lew last week, and House Ways and Means Chair Keven Brady, R-Texas, urged Lew to re-propose the rules before finalizing them. The meeting followed letters issued earlier by both Brady and Senate Finance Committee Chair Orrin Hatch, R-Utah, criticizing the rules.
Brady's letter was signed by every Republican member of the committee and expressed "grave concern" that the broad scope of the proposed regulations would negatively affect U.S. business, damage the economy and interfere with job growth. The committee highlighted its doubts concerning the regulations purported compliance with the requirements of the Paperwork Reduction Act and asserted that refined estimates of the documentation burden may invoke the Congressional Review Act.
The Congressional Review Act empowers Congress to review and potentially overrule, by means of an expedited legislative process, a regulation that results in an annual effect on the economy of at least $100 million, a "major increase" in costs or prices for consumers or industries, or a "significant adverse effect" on competition, employment, investment, productivity, innovation or the ability of U.S. companies to compete with foreign businesses.
The letter reinforced the committee's ongoing message that more time is needed, and that the regulations should not be finalized without certain identified areas being addressed. The letter states, in part:
Overall, the joint Ways and Means and Finance Committee discussion with your tax policy team reinforced our view that, at a minimum, a complete overhaul of the current proposal would be necessary in order to ensure that any rules in this area appropriately target abusive tax-planning without interfering with normal business financing arrangements...the American people deserve a tax system that reflects accuracy and correct policy, not rules that are rushed out without proper vetting and consideration.
Hatch's letter was sent on the same day and asked Treasury to re-propose the regulations in a "thoughtful, prudent and legal manner." Hatch's comments focused around the risks associated with Treasury's swift actions to finalize the regulations, and expressed concerns that the regulations could lead to unintended consequences. Hatch further questioned whether Treasury, in issuing the proposed Section 385 regulations in the manner it did, violated various administrative procedural requirements or other executive order requirements. Hatch concludes in the letter:
I therefore ask you to re-propose the regulations. Complying with such request would not necessarily delay the regulations beyond this Administration, as time may still exist to re-propose with a 90-day comment period, with finalization during this Administration. It is worth noting that under the current congressional calendar the 115th Congress will already have a chance to disapprove of the measure under the [Congressional Review Act], even if you were to finalize the regulations in Augusts 2016, so there need not be a rush to finalize swiftly the regulations...
So far Lew has promised that Treasury is taking all substantive comments seriously and will make necessary changes, but has not backed off the pledge to finalize the rules before the end of the year. Neither Brady nor Hatch has committed to holding a hearing on the regulations.
Read Grant Thornton's previous coverage of the proposed regulations under Section 385:
Ways and Means Democrats press Treasury on debt/equity regulations
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