Politico Pro: Trump's regulation order rekindles inversion debate

Familiar battle lines were drawn over regulations aimed at stopping inversions after President Donald Trump ordered a broad review of tax regulations Friday.

Critics revived their complaints that the rules went too far, and Trump and his team may agree. But supporters of the regulations said any move to water down or revoke them would reopen the door to corporations gaming the tax system and violate Trump's campaign pledge to crack down on U.S. companies that move abroad.

Treasury Secretary Steven Mnuchin acknowledged that the Section 385 regulation that the Obama administration issued late last year would be under the microscope.

"It's obviously one of the significant things and one of the things we will be looking at," Mnuchin said.

Trump's executive order, which he signed Friday, instructs Treasury to review all significant tax regulations the Obama administration put in place last year and determine if they cause undue financial burdens, are needlessly complex, create unnecessary requirements or step beyond legal boundaries.

Opponents of Section 385 — a two-part regulation to redefine debt and stock equity and limit serial inversions — believe Treasury's examination will lead to getting rid of the guidelines, even if the executive order is largely symbolic.

"We see today's action as a positive sign that the administration, and Secretary Mnuchin in particular, will take a hard look at regulations that I believe garnered more concern from the business community than any other Treasury regulation in my lifetime," said Nancy McLernon, president and CEO of the Organization for International Investment.

More than 6 million U.S. jobs are part of foreign companies' U.S. operations, including 2.4 million in the manufacturing sector, according to the global investment group. They face higher taxes and compliance costs under the Section 385 rules, McLernon said.

McLernon recently brought a group of foreign corporate executives to a meeting with Mnuchin in which they urged him to rescind the 385 rules, and they expect to continue that dialogue.

Any move against the rules wouldn't be immediate, though, cautioned former Treasury official Eric Solomon, who co-directs National Tax and the Americas Tax Center for EY.

"Some regulations could in fact reflect policies that the Administration might favor," he said in a statement. "After the determination is made whether to modify or revoke particular regulations, IRS and Treasury generally will follow notice and comment procedures to modify or withdraw them, so one must understand that this will take some time."

The review will be comprehensive, Mnuchin said, including the 385 rules and other regulations. An estate tax-related rule to change how family businesses are valued also proved unpopular in the business community.

Builders who belong to the Associated General Contractors of America have weighed in with Trump administration agencies on both the valuation discount and Section 385, and will continue to do so.

"This is Trump trying to show people he's doing stuff and making sure the agencies have the guidance," said Jeffrey Shoaf, the group's senior executive director of government affairs. "He doesn't know other ways except to tell them as publicly as possible, and this seems like a pretty public way to do it."

A statement from House Ways and Means Committee Chairman Kevin Brady (R-Texas) encouraged the administration to work to roll back the Section 385 and estate tax regulations.

"This Executive Order is another important step to make our tax system simpler, fairer, and more pro-growth," he said.

Opponents of the 385 rules, which Treasury finalized last year, said they went too far in allowing the federal government to reclassify debt as stock equity, in particular. That recharacterization authority is meant to limit the appeal for foreign-based companies to use intra-company loans to their U.S. subsidiaries and cut their tax bills in the process, a practice known as earnings stripping.

But supporters of the 385 rules said repealing or rewriting them could open the door to more inversions.

Rep. Lloyd Doggett (R-Texas) said the regulation has accomplished what it was supposed to: keep U.S. companies from skipping out on their tax bills. He lauded the regulation for sidelining a merger of pharmaceutical titans Pfizer and Allergan and faulted Trump for breaking campaign pledges.

"This is just another unnecessary Trump rhetorical executive order, but it and Treasury Secretary Mnuchin's related comments signal that Trump's previous big talk about getting tough on companies that move offshore represents just another broken promise," a statement from Doggett said.

Rep. Sandy Levin (D-Mich.), who like Doggett sits on Ways and Means, said in a statement: "Signaling that restrictions on such inversions might be eliminated or watered down is not putting America first — it's telling companies it is acceptable for them to renounce their citizenship by moving their addresses overseas to avoid paying U.S. taxes, while still reaping the benefits of effectively being based in the U.S."

Foes of the debt-equity recharacterization should sue the administration in court if they want redress, said Frank Clemente, executive director of Americans for Tax Fairness. Trump's position conflicts with supporters who voted him into office, he added.

Ultimately, tax reform legislation should obviate the need for these rules, Clemente said.

Mnuchin said the review wouldn't conflict with tax reform efforts, and wouldn't reignite corporate plans to relocate abroad as part of strategies to minimize tax obligations.