Last year, the National Association of Manufacturers (NAM) led the business community’s charge against the Department of Treasury’s proposed Section 385 debt/equity regulation that was proposed in April 2016. Under the original proposal, Treasury could retroactively treat a company’s related party debt as equity in common business transactions, overturning longstanding tax policy and well-established case law.
This proposal was certainly alarming to manufacturers since debt is fundamental to the structure of a business, and the proposal would impose new taxes on manufacturers by eliminating interest deductions and subjecting some dividend payments to withholding taxes. This shift would threaten legitimate and well-established business practices, from corporate reorganizations to day-to-day cash management. While the proposal was released as part of a package of guidance designed to curb inversions, these extremely broad regulations had little to do with this activity but will have a significant negative impact on a wide range of global and domestic manufacturers in the United States.
While final rules issued on October 13, 2016, made significant changes to alleviate some of the burden of the original proposal, the documentation, compliance and cost burden of these rules will still impact many manufacturers, which is why the NAM has asked the incoming administration to roll back this unnecessary rule.
To this end, the NAM is pleased to see that Congressman Todd Rokita (R-IL) introduced H.J. Res. 54 on January 31 to repeal Treasury’s Section 385 rule under the authority of the Congressional Review Act. This resolution will mark the end of the existing rules and ensure that the Treasury Department will not be able to ever again issue overreaching debt/equity rules.
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