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Jim Fuller |
David Forst |
The Obama Administration released a series of tax proposals in February 2015 in connection with its Fiscal Year 2016 Budget. There are some differences from previous years' Obama Administration Budgets and some signals as to the extent to which the Administration believes it can press its authority to write regulations absent Congressional action. The Budget essentially repeats last year's proposal that restricts the amount of interest income a US subsidiary of a foreign parent can deduct. Under the proposal a US member's deduction for interest expense generally would be limited if the member has net interest expense for tax purposes and the member's net interest expense for financial reporting purposes (computed on a separate company basis) exceeds the member's proportionate share of the net interest expense reported on the financial reporting group's consolidated financial statements (excess financial statement net interest expense). Also, if a member fails to substantiate the member's proportionate share of the group's net interest expense, or a member so elects, the member's interest expense will be limited to the member's interest income plus 10% of the member's adjusted taxable income.
The fact that this proposal exists at all is evidence that the Obama Administration believes that additional restrictions on interest deductibility (on top of the existing Code sec. 163(j)) must be achieved through Congressional action and cannot be achieved through regulatory action alone. Also in this regard, Notice 2014-52, last year's anti-inversion Notice, did not contain any further restrictions on interest deductibility.
The Budget's proposals enhancing Code sec. 7874, the anti-inversion provision, are also largely the same as last year's, such as reducing the 80% test in § 7874 to a 50% test, and eliminating the 60% test. The new Budget does ameliorate last year's proposal providing that a foreign company acquiring a US company would be treated as US if the expanded affiliated group is primarily managed and controlled in the US and does not conduct substantial business activities in a country in which the foreign acquiring corporation is created or organised. Under the new Budget, this rule would only apply if, immediately before the acquisition, the fair market value of the stock of the domestic entity is greater than the fair market value of the stock of the foreign acquiring corporation. Of course, the Administration, through Notice 2014-52, has already made an impact on inversion transactions by creating new rules under, inter alia, Code secs. 956 and 7701(l). However, a change in the basic mechanics of Code sec. 7874 would need Congressional action. We have discussed the operations of Code sec. 7874 and Notice 2014-52 in previous columns.
The Budget also repeats the Administration's proposal to codify Rev. Rul. 91-32, the revenue ruling that, in contravention of Code sec. 741, would treat a non-US person's sale of a partnership interest as US taxable income to the extent of the partnership's US business assets. The Administration has not taken regulatory action in this area, presumably because Code sec. 741 clearly addresses this issue.
Jim Fuller (jpfuller@fenwick.com) and David Forst (dforst@fenwick.com)
Fenwick & West
Tel: +1 650 335 7205; +1 650 335 7274
Website: www.fenwick.com
