Rocco Femia was quoted regarding the Internal Revenue Service's (IRS) recently released package of regulations aimed at attacking tax positions on outbound transfers of intangibles under tax code Section 367. "It's a sea change -- a very fundamental change. But this does much more than incorporate the IRS litigating position into regulation," Femia said. The change will not just affect companies with tax controversies involving intangibles; it will affect any U.S. multinational that is considering restructuring a foreign branch operation. "There are a lot of commercial reasons why taxpayers might organize in branch form when they are entering a market or exploring doing business in a market and decide later on that they wish to incorporate that business. These rules will insert tax considerations into those commercial decisions even more than is the case today," he said, adding that the statute provides exceptions, "most notably, for property used in active conduct of trade or business."
Some experts suggest that the proposed regulations combined with an immediate effective date creates uncertainty for taxpayers and could create the wrong incentives. According to Femia, taxpayers with branch operations currently may be forced to maintain those structures because the cost of reorganizing would be too burdensome; but it is difficult to project what the ultimate impact will be. "It is such a fundamental change. And it will affect behavior. There will be transactions that would have been done a particular way that will not be done. So it will be very difficult to quantify the impact -- but it is a very far-reaching change," he said.
Femia's comments were reprinted in a BNA Tax Management Weekly Report article titled "Sec. 367 -- Transfers of Property from the United States Proposed Regulations Modify Rules for Outbound Transfers of Property," on September 21, 2015.