In late July 2017, PwC Ireland released our opinions on the latest developments in US Tax Reform and Section 385 regulations on interest deductibility.
For further discussion on US tax reform or the Section 385 regulations and the impact it may have on your Irish business, please reach your usual PwC contacts.
The Republican Congressional leaders and Trump Administration officials leading the tax reform effort announced that they have dropped the controversial border adjustment tax from further consideration and discussion.
As discussed in our previous release, the border adjustment tax which was included within the House GOP tax reform blueprint, could have resulted in a significant challenge to FDI and investment in Ireland. The purpose of this proposal was to encourage the location of intangibles and manufacturing in the US by effectively exempting export sales income from US taxation and disallowing a US tax deduction for expenses that were regarded as imports into the US. As such, we would view this as a positive development for both Irish companies exporting into the US market and for continued US investment in Ireland.
Republican leaders issued a Joint Statement on 27 July 2017 which outlined their reasoning for excluding the border adjustment tax from further consideration. As quoted from the Joint Statement, "We are now confident that, without transitioning to a new domestic consumption-based tax system, there is a viable approach for ensuring a level playing field between American and foreign companies and workers, while protecting American jobs and the US tax base". The Joint Statement also stated, "while we have debated the pro-growth benefits of border adjustability, we appreciate that there are many unknowns associated with it and have decided to set this policy aside in order to advance tax reform."
We are anticipating Republican leaders, which includes members of the House, Senate and Trump Administration, to release a Tax Reform Framework shortly which may provide an outline of the various tax reform principles that they have agreed upon, and we will keep you updated on any developments in this regard.
On 28 July 2017, Treasury and the Internal Revenue Service ("IRS") issued Notice 2017-36 which provides for a one-year delay in the application of the documentation requirements in final regulations under Section 385. While the effective date of the documentation rules per the final regulations is 1 January 2018, Treasury and IRS intend to amend the documentation regulations to apply only to interests issued or deemed issued on or after 1 January 2019.
In summary, Section 385 prescribes rules for Treasury to determine whether certain instruments between related parties are treated as debt or equity. Included in the regulations are contemporaneous documentation rules as it relates to instruments issued between related parties. These documentation requirements were viewed by businesses as a compliance burden which resulted in the need for additional resources and the need for changes to existing processes and controls. This change could impact any Irish companies who have debt financed their US operations.
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