US Inbound: Executive Order could displace recent tax regulations
President Trump issued an Executive Order (EO) on January 30 2017 regarding regulations that could have a significant impact on recently issued tax regulations.
The Congressional Review Act permits regulations dating back potentially to 1996 to be invalidated by a (filibuster proof) majority of both houses of Congress and the President's signature, again with potentially major tax implications. In addition, the Internal Revenue Code provides that temporary regulations automatically sunset after three years.
The EO provides that for every one new regulation issued, at least two prior regulations must be identified for elimination. The EO provides that for fiscal year 2017 (ending on September 30) the total incremental cost of all new regulations, including repealed regulations, to be finalised this year will be no greater than zero. "Regulation" is defined broadly and for tax purposes it could include such guidance as IRS notices and revenue procedures in addition to Treasury Regulations.
The Congressional Review Act authorises Congress to override all regulations issued within 60 legislative days of their issuance through an expedited review process. Regulations issued in December 2016/January 2017 at the end of the Obama Administration all fall within the 60-legislative day window. In addition, the 60-legislative day window does not begin until the promulgating agency submits a report to Congress regarding the subject regulation. To the extent this notification is not complied with, any regulation issued since the passage of the Act in 1996 is subject to Congressional invalidation.
In addition, Code section 7805(e) provides that a temporary regulation expires (sunsets) within three years of issuance.
The potential tax impact of these cumulative rules is broad. For example, the section 385 regulations, which have a significant impact on inbound taxpayers, and have received substantial criticism from the tax community could be part of either a two-for-one trade or invalidated under the Congressional Review Act. The same could apply for recently issued regulations under sections 987, 367(d), and 901(m).
Section 482 regulations issued in September 2015 that reflect increased IRS aggressiveness in aggregating transactions and other transfer pricing areas are in temporary form and could simply be permitted to sunset and therefore be invalid in September 2018 if not otherwise invalidated per the EO or the Congressional Review Act.
We expect a great amount of activity for the rest of 2017 in this area, with a large number of regulations up for reconsideration.
Fenwick & West