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Back in April, our blog reported on how the Treasury Department had unveiled a series of proposed rules designed to target inversions and other related tax-saving strategies frequently undertaken by businesses.

To recap, an inversion typically involves a U.S.-based company merging with a company based in a nation with a more favorable tax climate and establishing the headquarters of the newly combined entity there. The practice, while technically lawful, has nevertheless proven to be a sore spot for both the Treasury Department and the Internal Revenue Service for many years.   

Under the proposed rules, inversions would be far more restricted and subject to considerably more government oversight. Furthermore, they call for a crackdown on a tax-savings strategy frequently employed by companies post-inversion known as earnings stripping.

Earnings stripping is a process whereby profits made in the U.S. are moved to the lower-tax nation in which the parent company is headquartered through the use of debt. Specifically, the parent company overseas makes a loan to one of its U.S.-based subsidiaries, which then makes interest payments to the parent that are deductible under the federal tax code.

This move to treat some intercompany loans as equity along with some of the other requirements has many business leaders concerned about the broader impact of the proposed rules.

“The breadth of the proposed regulations has shocked the business community -- they have overturned decades of settled law and would create substantial disruption to normal commercial business practices,” said the vice president of the Business Roundtable.

Lawmakers from both sides of the aisle are also concerned.

Indeed, both Republicans and Democrats on the House Ways and Means Committee have penned letters to Treasury Secretary Jack Lew, with the former citing concerns about the degree to which the proposed regulations could "affect ordinary business transactions" and the latter citing concerns over the ability of certain business sectors to implement these proposed regulations given "various regulatory requirements unique to those industries."     

It's worth noting that the 90-day public comment period for the proposed rules officially ends today and that the Treasury Department refused prior requests by business leaders to extend the window to October.

If the rules were issued as currently written, they would apply to debt issued after April 4. However, given the degree of controversy the proposed inversion rules have generated, there is a distinct possibility the final rules could be amended to some degree. Stay tuned for updates.    

If you have questions or concerns about tax compliance or other tax-related matters, please consider speaking with a skilled legal professional to learn more about your legal obligations.

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