Treasury Issues Controversial ‘Interest Stripping’ Final Rule

In response to comments from American Bankers Association and other groups, banks scored a win yesterday when the Treasury Department issued a revised final rule to address alleged “interest stripping” that carved out debt instruments issued by most financial institutions from an important portion of the rule. The Treasury proposal was targeted at 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, but ABA noted that it was far broader than headlines implied, with implications for ordinary operations of banks of all sizes.

In response to comments from ABA and others about the comprehensive regulatory and audit regime to which banks are subject, Treasury carved out an exception to the rule for debt instruments issued by an “excepted regulated financial company,” including insured depository institutions, bank holding companies and certain savings and loan holding companies. Treasury did not lift documentation requirements for regulated entities, but S corporations are exempt from all aspects of the final rule.

ABA’s request for a less punitive approach to documentation errors was acknowledged. Documentation under the final rule is treated as timely so long as it is prepared by the time the filer’s federal income tax return is filed. The final rule also provides a rebuttable presumption for documentation errors provided that covered entities are otherwise in compliance, instead of per se re-characterization of the debt to equity as proposed.

Treasury also delayed the implementation date, with the final rule coming into force only for debt instruments issued on or after Jan. 1, 2018. ABA staff will continue to review the 518-page final rule and provide analysis as needed. For more information, contact ABA’s John Kinsella.