ABA: Treasury’s ‘Interest Stripping’ Proposal Would Hinder Normal Business

The American Bankers Association today urged the Treasury Department not to proceed with a proposed rulemaking intended to address alleged “interest stripping,” transactions that use inter-affiliate debt to take deductions in a higher-tax jurisdiction and receive the income in a no- or low-tax jurisdiction. ABA noted that the rulemaking is far broader than headlines implied, with numerous implications for the international and domestic operations of banks of all sizes.

For example, the rulemaking could affect domestic banks’ state income tax liabilities, REIT or partnership affiliates and qualification as an Subchapter S corporation, as well as affecting bank customers that operate overseas. To ameliorate concerns about overreach, ABA recommended expanding exceptions for transactions undertaken in the ordinary course of business, narrowing the regulations’ focus to transactions structured with a primary purpose of tax avoidance, limiting IRS discretionary powers and simplifying documentation and enforcement provisions.

Considering the comprehensive regulatory and audit regime to which banks are subject, ABA also urged Treasury to carve out a broad exemption for financial institutions. “Interest expense is the ‘cost of goods sold’ for banks and the free movement of funds in legal structures to facilitate our customers’ needs is critical,” ABA said. “The potential broad application of the proposed regulations will interfere with normal business activities.” For more information, contact ABA’s John Kinsella.