Regulations: Text of regulations addressing inversions | KPMG | GLOBAL

Regulations: “Inversions” and earnings stripping; new business tax reform framework

Regulations: “Inversions” and earnings stripping

The Treasury Department and IRS late this afternoon released for publication in the Federal Register a package of regulations including temporary regulations (T.D. 9761) and by cross-reference proposed regulations (REG-135734-14) that address transactions that are “structured to avoid the purposes of sections 7874 and 367” and certain post-inversion tax avoidance transactions.


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Read KPMG’s initial analyses of the regulations


The temporary regulations concern certain domestic corporations and domestic partnerships with assets that are directly or indirectly acquired by a foreign corporation and certain persons related to the domestic corporations and domestic partnerships. 


In a related release, Treasury explained that the temporary and proposed regulations are intended to reduce the benefits of and limit the number of corporate tax inversions—including by addressing earnings stripping. As Treasury explained, in undertaking an inversion transaction, companies move their tax residence overseas to avoid U.S. taxes without making significant changes in their business operations. After an inversion, many of these companies continue to take advantage of the benefits of being based in the United States. 

Treasury Secretary Jacob Lew said:  


“Treasury has taken action twice to make it harder for companies to invert. These actions took away some of the economic benefits of inverting and helped slow the pace of these transactions, but we know companies will continue to seek new and creative ways to relocate their tax residence to avoid paying taxes here at home. * * * Today, we are announcing additional actions to further rein in inversions and reduce the ability of companies to avoid taxes through earnings stripping. This will have an important effect, but we cannot stop these transactions without new legislation. I urge Congress to move forward with anti-inversion legislation this year. Ultimately, the best way to address inversions is to reform our business tax system, which is why Treasury is releasing an updated framework on business tax reform, outlining the administration’s proposals to date as a guide for future reform. While that work goes on, Congress should not wait to act as inversions continue to erode our tax base.”

Treasury’s summary of actions to address inversions

Today’s Treasury release explains that the regulations will:

  • Limit inversions by disregarding foreign parent stock attributable to recent inversions or acquisitions of U.S. companies—to prevent a foreign company (including a recent inverter) that acquires multiple U.S. companies in stock-based transactions from using the resulting increase in size to avoid the current inversion thresholds for a subsequent U.S. acquisition.   
  • Address earnings stripping by: (1) targeting transactions that generate large interest deductions by simply increasing related-party debt without financing new investment in the United States; (2) allowing the IRS on audit to divide debt instruments into part debt and part equity, rather than the current system that generally treats them as wholly one or the other; and (3) facilitating improved due diligence and compliance by requiring certain large corporations to do up-front due diligence and documentation with respect to the characterization of related-party financial instruments as debt.  If these requirements are not met, instruments will be treated as equity for tax purposes.
  • Formalize Treasury’s two previous actions in September 2014 and November 2015. 

Treasury will continue to explore additional ways to address inversions. 

Updated framework for business tax reform

Treasury today also releasing an updated framework for business tax reform that revises the framework released in 2012. The Treasury release states that this updated version sets out the key elements of the president’s approach to reform and details the specific proposals the administration has put forward, including a comprehensive approach to reforming the international tax system. Additional information is provided on a Treasury fact sheet.

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