WASHINGTON–Critics are imploring the Obama administration to withdraw or change proposed tax regulations aimed at eliminating controversial strategies such as earnings stripping and corporate inversions.
At a Thursday hearing at the Internal Revenue Service, representatives of trade groups aired their frustrations with the proposed rules.
“We are concerned about potential adverse market chilling effects that will be triggered by the application of the regulations,” said Daniel Goodwin, director of mortgage policy for the Structured Finance Industry Group, which represents firms including Bank of America Merrill Lynch, Deutsche Bank and Fannie Mae. “Among other concerns, the risk of adverse tax consequences would significantly reduce liquidity, erode investor confidence, and disrupt the capital markets, inevitably reducing liquidity in the market place.”
In a subsequent interview, Goodwin says there’s a risk the regulation would affect securitizations where the asset originator reuses a vehicle for funding, for example a bank that has a broker-dealer affiliate.
“If the broker dealer is distributing the securities that are a result of the securitization activity, because they are an affiliate, the transfer of the assets and the subsequent securitization activity would fall under these regulations, and this debt issuance could be re-characterized as stock which would have horrible circumstances from a liquidity perspective.”
There’s also a risk that regulations would impact an unsold tranche. “That creates a whole bunch of bad circumstances because you would have a half class of bonds that would be a lot less liquid than the other half, for no other reason than the fact that during the normal market making activity these bonds were retained and then subsequently sold,” he said.
Citing the potential for choppy waters, witnesses at the joint IRS-Treasury hearing urged the government to pull back the proposed regulations, or at the very least make substantive changes.
“Given the far reaching and sweeping impact of these rules, we continue to believe these rules should be withdrawn,” said Caroline Harris, vice president of tax policy at the U.S. Chamber of Commerce. “In the absence of withdrawal, we believe their scope should be significantly curtailed to its original intent, which is to target earnings stripping.”
Earning stripping is a term describing tactics corporations use to avoid domestic corporate taxes.
Goodwin claimed the broad scope of the rules will lead to misinterpretation.
“The various examples of adverse effects would be inconsistent with the stated purpose of the proposed regulations,” said Goodwin. “The Treasury and the IRS do not wish for unnecessary uncertainty, so to minimize the risk of adverse effects there must be more clarification on the intended scope of the regulations.”
Harris suggested pushing back the implementation of these rules to 2019, a request echoed by other speakers.
Although the comment period has ended, the Treasury can still make adjustments to the regulations before they are finalized later this year. The regulations will not be effective until 90 days after the Treasury has adopted the rule as a final regulation.
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