“It's pretty obvious that the proposed regulations are probably invalid,” said Adam Halpern, an international tax lawyer with Fenwick & West LLP. Halpern spoke in an interview after the hearing.

The proposal aims to expand on a 1969 regulation that gave the Treasury authority to write rules on how to tell debt from equity in related-party transactions. But that earlier regulation also lays out conditions for new rule-making, Halpern said — Treasury must describe in detail the economic, financial and other factors that would govern how to make distinctions.

Case law suggests that such factors would include the parties' creditworthiness, their earnings prospects and their debt-to-equity ratios, Halpern said. None of those are present in the proposed regulations.

“Treasury has the authority to make guidelines, not bright-line rules” under the 1969 regulation, said Joseph Judkins, an international tax lawyer at Baker & McKenzie LLP, who also spoke at the hearing. He spoke in an interview afterward.

Varied Objections

Banks, accounting firms, manufacturers and other multinationals as well as major trade groups and tax lobbyists have objected that the proposed regulations go well beyond their intended target. For example, the rules would apply to companies that have always been headquartered outside the U.S. — not just recent tax emigres. Big Four accounting firm PriceWaterhouseCoopers has written in a research note that the proposed rules would “vitiate internal cash management operations” that global companies use on a daily basis to fund their internal operations.

Treasury announced the rules in April as part of a group of measures aimed at foiling “corporate inversions” — in which U.S. companies merge with offshore counterparts and shift the resulting corporation's tax address overseas. But many companies have complained in letters to the Treasury Department that the rules would ensnare scores of ordinary business dealings among global companies that haven't inverted.

Treasury officials have said the agency has the statutory authority to promulgate the proposed rules. The agency has received “a variety of comments” on them, “all of which we believe we can respond to in the final regulations,” a department spokeswoman said in an e-mailed statement.

It's unclear when the regulations might be final, however. “It is important that we get these regulations right, and the exact timing for finalization will depend on when we are satisfied that we have addressed any reasonable concerns,” the Treasury spokeswoman said.

Samuel Thompson, who teaches tax law at Pennsylvania State University, said critics were reading the 1969 regulation too narrowly and that Treasury does indeed have authority to write new rules that “may be necessary or appropriate.” But he also suggested that officials might want to get the views of the Justice Department, which would represent the Treasury in any legal challenge.

Pfizer's Deal

Treasury's related-party debt proposal was announced on the same day that another measure — one aimed at preventing serial inversions — effectively killed a planned $160 billion merger between Pfizer Inc. and Allergan Plc. That deal would have created a new company with a tax address in Ireland, where the corporate tax rate is 12.5 percent. The top U.S. corporate tax rate is 35 percent.

Inversions have emerged as a hot-button topic in the 2016 presidential race, with both Democratic and Republican candidates vowing to crack down on them. More than 50 companies have undergone them since 1982, almost half of them since 2012. President Barack Obama's administration has issued a series of regulations aimed at the practice.

But the proposed rules on related-party debt have drawn the largest outcry. In Congress, members of the tax-writing House Ways and Means Committee wrote to Treasury Secretary Jacob J. Lew on June 28 saying the regulations would “threaten jobs and economic growth.” The committee asked Treasury officials to “conduct a thorough economic analysis to ensure they understand the full impact these regulations will have on the U.S. economy.”

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