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October 5, 2017

Treasury Department Holds Off Repealing Anti-Inversion Rule

  • The U.S. Treasury Department says it will hold off revoking the rule aimed at cracking down on tax-slicing “inversion” mergers implemented by the Obama administration last year—days after the regulation was invalidated by a federal court in Texas on procedural grounds.

    In a report released by Treasury Secretary Steven T. Mnuchin yesterday, the Treasury Department said it anticipates that the issue of discouraging inversion mergers will be addressed in the tax overhaul being developed by President Donald Trump’s administration and Congressional leaders.

    “Tax reform is expected to obviate the need for the distribution regulations and make it possible for these regulations to be revoked,” Secretary Mnuchin stated in “Second Report to the President on Identifying and Reducing Tax Regulatory Burdens, Executive Order 13789.”

    “In the meantime, after careful consideration, Treasury believes that proposing to revoke the existing distribution regulations before the enactment of fundamental tax reform, could make existing problems worse,” the report added.

    Mnuchin also warned that the anti-inversion rule would be revisited if it were not addressed under tax reform: “If legislation does not entirely eliminate the need for the distribution regulations, Treasury will reassess the distribution rules and Treasury and the [Internal Revenue Service] may then propose more streamlined and targeted regulations.”

    The inversion rule followed a series of mergers in which foreign-domiciled buyers acquired U.S. companies, creating combined companies that enjoyed lower corporate taxes. The rule effectively torpedoed plans by Pfizer to acquire Allergan for $160 billion, in what would have been the largest-ever inversion merger.

  • Corporate Tax Cut Proposed

    On September 27, Trump joined Congressional leaders in unveiling the outline of a tax overhaul plan. “Unified Framework for Fixing Our Broken Tax Code” proposes reducing the corporate tax rate from 35% to 20% among provisions designed to stimulate business activity. The measure faces an uncertain fate in Congress and opposition to some provisions, such as eliminating the deduction of state and local taxes.

    Two days later, the U.S. District Court for the Western District of Texas invalidated the anti-inversion rule—siding with two business groups in deciding that the Treasury Department and Internal Revenue Service (IRS) were required to give public notice and solicit public comment before implementing the regulation.

    However, the court also ruled that contrary to arguments made by the Chamber of Commerce of the United States and the Texas Association of Business, the IRS and Treasury Department had not exceeded their authority and had not acted in an “arbitrary and capricious” manner.

    Trump effectively ordered his administration to revisit the anti-inversion rule through Executive Order 13789, signed April 21. The order directed Mnuchin to immediately review “all significant tax regulations” issued by the Treasury Department on or after January 1, 2016.

    Mnuchin was also directed to consult with the Administrator of the Office of Information and Regulatory Affairs and the Office of Management and Budget before issuing a report identifying regulations that, according to the order:

    • Impose an undue financial burden on United States taxpayers;
    • Add undue complexity to the Federal tax laws; or
    • Exceed the statutory authority of the IRS.

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