IRS and Treasury's Proposed Regulations: Impact on Inbound Companies and Taxpayer Response

The IRS and Treasury's proposed regulations, unveiled on April 9, introduce significant changes that could have far-reaching implications, particularly for inbound companies, experts caution. At the heart of these regulations is a new 1% excise tax on corporate stock repurchases initiated after December 31, 2022. Enshrined in the 2023 Inflation Reduction Act, this tax targets stock repurchases valued at 1% of the fair market value of repurchased stock by specific corporations during a taxable year, with potential adjustments applied.

According to insights provided by Jeff Borghino, a corporate tax partner at Grant Thornton’s Washington national tax office, these proposed regulations offer much-needed clarity on key terms and the scope of Section 4501 within the US Internal Revenue Code. This section is pivotal as it imposes the stock repurchase excise tax on covered corporations. Borghino also notes that anticipation has been building within practitioner circles for these regulations, underscoring their significance within the tax landscape.

Despite their importance, businesses face a tight timeframe for providing feedback on the proposed regulations. Borghino highlights the necessity for written comments to be submitted by specific deadlines—May 13 and June 11, 2024—underscoring the need for swift action. However, he also offers a silver lining, noting that taxpayers will have a grace period of at least four months post-publication of the final regulations to evaluate their circumstances before filing tax returns and remitting payments. This grace period, extending until the due date of Form 720 for the first full calendar quarter following publication, provides a window for careful consideration and adjustment.

Josh Odintz, tax partner at Holland & Knight in Washington DC, raises concerns about the potential adverse effects of the proposed regulations on inbound companies. He specifically points to the unexpected application of the funding rule from Notice 2023-2, which extends to foreign stock purchased between January 1, 2023, and April 12, 2024, despite previous indications of its elimination. Odintz emphasizes that this rule, designed to prevent abuse and tax avoidance, appears to have a broader impact, affecting ordinary business transactions beyond its intended scope.

Further scrutinizing the principal purpose test, Odintz argues that it unjustly assumes abusive behavior where none exists, particularly in scenarios where foreign businesses do not engage in stock repurchases at the US subsidiary level. He criticizes the Treasury for casting transactions as abusive based on this test, asserting that such an approach exceeds reasonable boundaries and could have unintended consequences for businesses operating within the regulatory framework.

By fLEXI tEAM