- So, welcome back from
that munificent lunch.
It is my distinct pleasure,
to have the opportunity to introduce
Bob Stack, who is going to be our speaker.
Bob is Deputy Assistant
Secretary for international
tax affairs and the Office of Tax Policy
at the United States
Department of the Treasury.
He's responsible for
conduct of all matters
relating to international
tax policy, tax treaties,
representation of the United States
and international organizations,
dealing with other
branches of the government
and other executive branch agencies.
In that capacity, he is
of course US delegate
to the Committee on Fiscal
Affairs of the OECD.
And I would say in this
regard that he has been
as I said earlier, a
constant and I think heroic
participant in the unfolding
of the BEPS project.
Quite apart from that Bob
spent a great deal of time,
more than 25 years in private practice.
And he is truly one of the outstanding
international tax
professionals in this country.
So without further ado,
I introduce Bob Stack.
(crowd clapping)
- Thank you, David, for
the kind introduction.
And, one of the nice
things about practicing
international tax law in Washington
is it's a community where
I've certainly benefited from
lots of time and discussion
with David on important issues
and are kind of feeding back and forth
of how we grow in these various spaces.
In fact, the 385 reg's were David's idea
and I want to give him
credit for that.
(crowd laughing)
Okay, that was joke.
The, I spoke here two years
ago and I gave this speech
at this conference, and
I used the phrase about
the OECD getting the tax administration's
wanting blunt instruments
in order to basically rein
in tax payers around the world.
And I flew that evening to
Paris for the OECD meetings.
And that was one of the
several times in which
I would arrive in Paris, to
be told that people were very,
very angry that I wasn't
toeing the OECD line.
And more interestingly enough,
my French speaking
colleagues, but colleague,
particularly Pascal didn't know
what a blunt instrument was.
So I had to kind of
help him understand that
so that he could get the point.
Not much going on in international tax,
I really had to kind of scrape
around for what to do today.
And as much as I know,
we're interested in 385 and inversions,
I do feel something of a civic obligation
to talk to American audiences,
about the international environment,
at least I want to start here,
in which I operate as the
US representative, abroad.
You know, people said in the
past this particular job,
Deputy Assistant Secretary International,
might have been doing the treaties
might have been doing
the international regs.
And now the issues flow by us so fast,
it's really I have to say,
sometimes challenging just to keep up.
But I do think one theme
I want to share today,
and I think as I walk through this things,
is the degree to which
the US tax policy debate
often takes place in
a rather myopic space,
or from a myopic point of view.
And, I think, you know,
if I dove into 385,
and inversions, I'd be
really proving that case
that because I'm in front
of all these talented
technical tax lawyers and accountants,
that the most critical
issues in international tax,
relate to the United States
most recent regulations.
But I spend an enormous
amount of my time and energy,
in the international space,
and I want to walk you
through some of that
today, in terms of context.
Because I don't think the
United States tax community,
I do not think the United
States business community
is sufficiently engaged in the
global agenda setting in tax.
And I don't think it's enough anymore
to simply look at the US
Congress or even the US Treasury,
as the font of all international tax
that affects your lives
and your practices.
And I'll begin by just
talking about the G20.
I was explaining to someone yesterday.
I'm virtually certain that
before I came into government,
I suspect I was vaguely
aware that the G20 was a
top 20 economies by size in the world.
I may have been aware that
they meet from time to time.
I certainly was not aware
that the finance ministries
get together three or four times a year
and put out a communique.
And I was less aware that
the leaders meet annually
and put out another communique.
But the G20 is a critical driving force
of global international tax policy.
It is something I pay
extraordinary attention to
in great detail, because
it will trickle down
into us tax policy, one
way or another, at one time
or another, and I'll give
some examples of that.
Put, stepping back out
of even outside of tax,
the driver of putting together
the meetings of the G20,
related to the fact that
before these countries
got together as regularly as they do
to talk about a variety of topics
whether it's banking
regulation, environmental tax,
fighting crime attacks, illicit
flows, terrorist financing.
And the list goes on and on.
I've been told that, you
know, countries barely
knew each other at this
administrative executive level.
So if there was an Asian
financial crisis, you know,
people in US Treasury kind
of struggled to figure out
who does one talk to and how,
about things happening in
that other country's economy.
And so the G20 meetings
became a way to bring together
the world's largest economies,
to talk about issues
that cut across economies
in these broad areas,
do some standard setting,
hold each other to account
and drive various agendas.
And one of the agendas that
have been in this space
since I had my job and since before,
were elements of the
international tax agenda.
And I need give no better example,
than the fact that the OECD BEPS project
grew out of a G20 leaders
communique in June of 2012.
And I heard no, I've heard an
enormous number of people say,
when the BEPS project took off, you know,
they expected another
kind of sleepy project,
putting a bunch of things on the shelf
that would be ignored.
And now I've heard a great
number of people saying
that was not the case.
In fact, it had an enormous, has had,
will have, an enormous global influence,
and that relates to the
importance of the mention
of base erosion and profit
shifting by multinationals
in a G20 communique in 2012.
More recently, for
example, the G20 has asked
something called the Global Forum
on exchange of information,
on Transparency
and Exchange of Information
for Tax Purposes,
what we just call the Global Forum,
that monitors information
exchange among countries
on request, the G20 asked it to monitor
the exchange of information automatically,
which relates to FATCA,
and the globalization
of FATCA through the CRS.
Now the effect of asking an institution
like the Global Forum, to monitor us,
is that at some point they
will have the standards,
and at another point,
countries that do not satisfy
the standards of the
common reporting standard,
may well be identified and called out
for this kind of global world pressure.
And I'll just, I'll come back to it later.
But this is an area where
countries do not like to be
singled out in a communique,
for not going along with
the global standard,
not least because the
United States is trying
to set global standards
that we want other countries
to go along with and it's just harder
if we're not living up to
obligations and commitments
that the rest of the world is making.
So it's a remarkably important place.
If you want to follow where
international tax is going,
take down those finance
minister communique
and the leader communique, read them.
There's a little bit, it's a little bit,
there's a lot of inside
baseball in the language,
but once you're in the club,
you kind of realize what's happening.
But it's very predictive
of where things were going.
I was just looking back at
a similarly with the GA,
I was looking at back at
the 2013 GA communique,
which talked about country
by country reporting,
around the same time BEPS was starting.
And you know, now, three years later,
you're seeing the EU,
mandating public country
by country reporting, and I think,
it behooves us to be
watching the global debate
and see how it goes.
Now, last week, just to finish in on that
in the communique, what were the topics
that we're prominently fleshed out.
Well, there were the BEPS topic
which has been regularly in there,
and now we're about, you
know, implementation of BEPS,
and I'll come back to that.
There's an inclusive framework
that's going to bring even more countries
into the BEPS, or a bit by having
countries meet to set standards,
think about implementation,
refine some of the
guidance that's been given.
There's always a section
on the automatic exchange
of information, which is FATCA,
and the creation of the
common reporting standard,
and a desire to have all
countries move to it and adopt it.
There's always developing
country tax issues.
And here too, I spend
more time on developing
country tax issues than I
ever would have imagined,
but I will tell you two
things about those issues.
Number one, it's a space
in which the NGO community
plays very heavy, is very strong,
and many of the ideas that begin
in that developing
country space percolate up
to the developed countries space
and become tax policy issues,
that you all start to
see in your practice.
And country by country reporting,
by the way, is an example of that.
And now the last thing that popped up
in last week's communique,
it's been there a while,
but the Panama Papers
gave it an extraordinary,
extra impetus, is the concept
of beneficial ownership,
of entities and accounts.
And this began to take on
new urgency at the G20,
and you're going to see greater
pressure on transparency,
not just with respect to
accounts and tax evasion,
but when you get up to
the political level,
questions of transparency for individuals
get easily conflated with
questions of transparency
for multinationals, and you can imagine,
an acceleration for
example, in the push for
making various elements of
beneficial ownership public
in the company, by company
space and greater debates
on the beneficial ownership,
you know, issues greatly.
Now, these agendas,
are certainly pushed
by tax policy makers.
But I think, maybe it
shouldn't have surprised me.
But what has fascinated me anyway,
is somebody coming from the
outside into government,
is the degree to which events
propel these issues through the system.
And I don't think one could underestimate
the at least short term impact
that the release of the Panama Papers
has on the issue of transparency
and pushing forward issues
of beneficial ownership.
When you have an event like this,
one of the first things that
happens is the ministers,
demand deliverables and new actions
and greater something or other,
and so you're, even
though those of us who are
tax professionals, we
could tick off six reasons,
a Panama company may be
fine, it may be criminal,
it may be somewhere in the middle.
But all by itself, the
fact that there's X number
of papers or X number of entities,
I think as tax professionals
we know doesn't really tell us much.
But it has told the world to get in gear,
for pushing forward on transparency
and you're going to be seeing
I think news of that every day.
So I think that
US tax policy takes place,
much, much less in a vacuum of what
one party in congress thinks,
or even what the treasury thinks.
It's a constant part of my job.
And CbyC is a good example
that we're there now
in part because of the
international push for it.
And even something like
transfer pricing documentation
where every country is going to have
a particular approach,
we are at the OECD BEPS project
we put together a package
on how to do country,
I'm sorry, transfer pricing documentation
with a local file and a master file.
And that's kind of a good example
of a, globalization that has
very strong pluses.
And perhaps some trade offs.
The pluses are that the
multinational community
didn't want to face 150 different
local transfer pricing
documentation obligations,
and the countries wanted more information.
And so sure, you get
criticized, I get criticized,
because, for example,
the master file requires
things like financial
statements of private companies,
which up until now have not necessarily
been given to tax authorities.
But at the same time, the
multinational community
with whom we worked, wanted to get some
standardization in that space.
But these are really both two examples of,
international forces shaping tax policy
here in the United States.
The NGO community, as I mentioned,
is an extremely,
strong presence in all of these debates,
and I've been commenting
recently in my public statements
that It appears to me from where I sit in
so many venues that the
multinational community
somewhat ironically, given their heft
and their importance in the global economy
seems to be almost absent from setting
the global international
tax policy debate.
Whereas the NGOs are
extraordinarily strong.
And I'll give you an example
that just happened this weekend.
There was a panel at the IMF
spring meetings that Christina
Gard participated in,
and Nobel Prize winning
economist Joe Stiglitz
and for the first time I
heard the NGO community
latching on to a minimum tax as something
that could be beneficial
to developing countries.
And I actually think
that's right, personally.
And then why is that.
Well, because if US multinationals knew
that if they shifted
income at a poor countries
into tax havens, it
was going to be subject
to some minimum tax rate
in the United States.
It takes the pressure, I'm
sorry, it takes the benefit
out of stripping out of the
poor country, off the table.
And if the United States in Europe,
the home of the residents countries
adopted similar policies, this could be
extraordinarily beneficial
to the developing countries.
And it was the first time
I've heard it pushed in
the NGO community as something
to help developing countries.
And as I mentioned, the
developing country agenda
is often the incubator
for ideas that get greater
acceptance, perhaps when it's too late
for all you folks to
realize what's happened.
And I simply point that out
as another thing to watch.
So let me circle back
in on just a couple of
the in depth on some of the issues that,
again, we're framed in the G20 place.
And I'll start with
BEPS, and I'll give you
a very quick highlight of kind of
what's coming up in the best space.
I think the, among the most
critical things about BEPS is
working on implementation
of the BEPS deliverables,
and the most critical
element of implementation
is putting into effect the four things
that countries agreed on as
so called minimum standards,
and the four minimum standards,
the first was around country
by country reporting,
which you know, we've
proposed regulations.
Other countries have, there's a bit of a,
there's a problem at the
moment as the different years
and we're working on
seeing what we can do to,
both with countries and
within the United States
to kind of smooth that over.
So we have a smooth start
to country by country.
There's a minimum standard
with respect to treaty abuse,
the United States already has
a limitation on benefits provision.
So the concept here
was when a country goes
to negotiate a treaty
with another country,
that other country now
as a minimum standard,
must permit the first country,
to insist on a provision
to protect its tax base,
or I should say protect
against treaty abuse.
The United States uses
limitation of benefit.
Many other countries now
are going to move towards,
a diverted I'm sorry, a
principal purpose test,
whereby if the principal purpose
of the use of the treaty was
to get treaty benefits not
intended or some standard
that we've complained
about is too subjective,
then the country giving the
benefits can deny the benefits.
We will see that incorporated
in treaties around the
world one way or another.
The next minimum standard related to
improving the mutual agreement procedures
because one of the really
important things was
that countries are putting
the right resources
into map cases, that they're settling them
on a principle basis.
That there's some transparency.
You know, how many map cases
does this country have.
How old are they.
How are they doing.
That there's some taxpayer input
so we can hear from
taxpayers, about bad practices
of different countries in the map place.
And that work is going on to kind of
fashion, the standards
for a map process
and setting forth a peer review process,
so countries can kind of
review each other's compliance
with both the spirit and
the rules surrounding map.
And the last one, it relates
to harmful tax practices.
And here, I would just
highlight that it was really
the harmful tax practice
work that drew in,
or put to an end really
to the UK patent box
that did not require,
any particular research and development
to be done in the country before.
But, on the same time,
people could get benefits
of taking royalties,
let's say into the UK,
get them taxed at 10%,
but get 25% deductions
out of Germany with doing
very little but moving paper,
into the UK and that was
the type of work
the forum on harmful tax practices does.
But much more important in this space
is countries have come together
to agree to exchange rulings.
So the Lux Leaks event, another big event,
put a focus on the fact
that countries were giving
rulings that were advantageous
that if the other countries
that were affected
by the ruling had the ruling,
at least they'd be tipped
off to the fact that
there might be some
tax avoidance going on.
And now countries have
agreed, as a matter of course,
to share, rulings that affect
cross border tax flows,
and the United States
will do that as well.
That does not involve bilateral APAs,
but it does involve other rulings
that might affect cross border,
which I don't think is
a huge, I don't think
this practice particular
one was aimed at us.
A couple of other points,
while I'm on the BEPS project.
I think we're gonna see
the work on interest.
The UK has already either
introduced it in its budget
or enacted and I'm not sure which,
but you know, that that was the provision
that really lowered the
deductibility of interest
to the 10 to 30 range,
and at the same time,
gave countries an option
to have a leverage prove out here.
The concept was that a country's internal,
deductions should not
be greater than their
deductions related as a
group to external borrowing.
And so then the question became,
you set limits around the world,
but if a country, if
a company were to have
leverage outside greater than that 30%,
then the company can come in, show that
and actually get to have a greater debt
to show interest ratio
in the home country.
And that is similar to
the US budget proposal,
although we use a less generous 10%.
I think you'll see the work on hybrids.
Again, I think you'll
see countries adopting
the hybrid work which reached
an unfortunate 400 pages.
The other things are, the
attribution of profits work
will continue this year,
I mean, we were upset
about changing the definition
of PE without having
some broader agreement on
the attribution of profits.
I think, part of the problem in this space
is the number of countries
that do or do not
adopt something called the approved OECD
method on profit attribution.
So I'm, not 100% confident that this work
is really going to provide the clarity
that we thought would have been necessary,
but that work will continue.
And then finally, the United States
is a big proponent of,
mandatory binding arbitration
in treaties, not because
we want to arbitrary cases,
but the theory is, if you
have arbitration provisions
in a treaty, it creates
a kind of better process,
up and down the chain of administration.
If the people know that
at the end of the day,
an arbitrator is going to pick between
two offers, from one
offer from each country.
And you know, this is one
where India is not interested
for now and doing it but we
do have about 20 countries
willing to move forward on arbitration.
And we're working on that.
And some of these items
will be in a multilateral
instrument that the OECD is negotiating
and working on this year,
so that countries do not
have to amend everything
on a bilateral basis
whether there's a reason
for the United States to
sign that multilateral
at the end of the day
will remain to be seen.
We already have LLB, we
already have partnership
look through our rules and our treaties.
We already have arbitration
and our treaties the way we like it.
And it's simply is
gonna remain to be seen.
On transparency, which is,
I think, the next wave,
the next thing, you're gonna see,
an article every day on transparency.
The first thing I want to point out is
in the United States fact agreements,
you may recall that the
way FATCA got implemented
around the world is as follows.
If I could say to financial institutions
around the world, if
you're not willing to do
some due diligence, find out who your US,
account holders are, you,
Mr. Financial Institution
are going to suffer a 30% withholding tax
on every nickel and every
investment you're getting
out of the United States
interest, dividends, etc.
Well, that gave the financial
institutions of the world
and impetus to come on board with FATCA.
But guess what, those institutions said,
well, wait a second.
We just can't tell the US
government or any third party
who our account holders are
and turn over that information.
So we had a bit of a glitch.
And what happened and my
predecessor Manal Corwin
from KPMG gets enormous credit for this.
They went to the countries and said, okay,
how about you make your law,
the law that requires these
financial institutions
to give you the information
about US account holders.
Where upon the country said,
fine, but we want something.
And the something they wanted,
was they wanted to know
about their residence
in the United States.
And we said, in many cases, fine,
we will do a reciprocal agreement.
If we're convinced that you
have the policies, processes
and procedures and computer technology
to take information in
and keep it confidential,
and we trust you to use
it for tax purposes.
And if you have a society
that has sufficient
rule of law, that it's
a good judgment to let
that country have a
reciprocal agreement with us.
But what can IRS give the other country,
only what it collects.
And while as you know, the
IRS collects information
on dividends and interest
from financial institutions
and the like, there are some things we get
from foreign financial institutions,
that we don't, that the IRS doesn't get
from financial institutions here.
And the two most important ones, are,
the IRS does not learn
the full account balance
in a in a financial account.
And it doesn't learn who are the owners
of entities that hold passive assets.
So if a Swiss person comes here,
and opens up a US Corp,
and in that us Corp
is a bunch of stocks and bonds,
we don't as a tax matter,
require that entity
to tell the financial institution
who the owners of the entity are,
and we don't require the
financial institution
to report it to the IRS.
So we are not fully symmetrical in FATCA,
the way, with the same type of information
that we receive and effect.
And I wanted to draw
out on this today some,
is because in the current
wave of transparency,
more and more countries
are going to be asking,
why is the United States not compliant
with the very standard that it has sold
to the rest of the world.
And in the last three green books,
I think it's two or three green books,
United States administration
has put forward a statute
asking to have this type
of reciprocal information
that can go to the IRS
and to the other countries
to make our deals fully reciprocal.
And it's this kind of
international standard setting
where we might, for example,
be viewed as the rest of the world
as not fulfilling commitments
we're asking others to make,
which also makes it more difficult
for us to go to other
countries and ask them
to also meet global standards
that we would like to be setting.
So I think we're going to
see more in that space.
The second thing that I'll point out
in the area of transparency
and tax evasion
is we have eight tax treaties
pending before the United States Senate,
which has not ratified or given advice
and consent to a treaty since 2010.
Three of those treaties
are particularly important
in the space of tax evasion.
The new protocols with
Switzerland and Luxembourg
make it easier for the
IRS to obtain information
that is foreseeably relevant
to US tax audits from those countries.
And ratifying, giving advice
and consent to those
treaties would also aid us
in this tax evasion debate.
And finally, there's the
multilateral convention
on mutual assistance in tax matters,
which is kind of like a global tier.
So you have more countries
that you're in this tax
information exchange with.
I mentioned these today,
because I do think we're going to see
additional emphasis on
the transparency issues
on where is the United States.
And the final one I'll mention
is, on March 30 or 31st,
we announced that we will
very soon propose regulations,
to require the foreign owners
of US single member LLCs,
to acquire a tax identification number
and essentially treat the US single member
LLC as a corporation,
for purposes of 6038A.
And why is that important.
Because in the absence
of that identification
of the foreign owner, a foreign person
was able to establish an
LLC in the United States.
And if the asset in that entity was,
let's say, a foreign bank account,
was stocks and securities
and foreign countries,
when another country came to
the United States and said,
hey, we're doing a tax audit of Mr. X.
Can you tell us who the
owner of this LLC is.
We were not able to do that.
And in that sense, we were falling down
on our obligations on
beneficial ownership.
It puts the United States
in a funny position,
to be calling out Panama for weaknesses
on the beneficial owner space,
and not necessarily getting our own,
work, in good shape as well.
So, I wanted to just run
through where with BEPS,
I left out one thing on
BEPS that I'm actually
I feel very good about
in terms of going forward on BEPS.
One of the things I've seen in my job was
a disconnect, if you will,
between revenue authorities
and finance ministries around the world.
It's the more time I spent
with revenue authorities,
the more the light bulb went off,
that revenue authorities
are interested in one thing, revenue.
And what they're not
thinking about is, well,
what are the right ways to attract
foreign direct investment
into our country.
You know, India wants to move up the chain
of countries that are
easier to do business in,
but are they making the connection
between the ease of doing business
and some the tax stories that
some of you might encounter
in doing business with India.
More broadly, finance
ministers from countries
would come in the United States.
They go to meetings with us business.
And they say, we want more
foreign investment in the US,
but seemingly completely unaware
of just how difficult
perhaps unprincipled,
perhaps time consuming,
dealing with the tax authorities
in those countries are.
So we went to the G20.
Now trying to use the G20 space,
to affirmatively help, both global growth,
multinationals building on principles,
and we said, don't we
need to do a work stream
on the importance of better
certainty in tax law,
whether it's the laws, the
policies, the administration,
and concepts of global growth
and foreign direct investment,
and the Chinese or the
current president of the G20.
agree that that's a good work stream
and the Germans were the next president,
wanna take it forward, and
they've agreed in the July,
finance ministers meeting
to have a symposium
in which Secretary Louis will participate,
to talk about and raise up these issues
of the critical relationship
between tax certainty and investment.
And then, the way the G20 works,
we hope we can put this
on a path going forward,
and have gotten a little off defense
and a little bit focused
on things that can help us
going forward improve the
global tax environment.
So let me end with just
a couple of words on
385 and inversions.
I guess, as I was, you
know, thinking about today,
I was going back through
some of the Treasury
stances on these two topics.
And, I wanted to stress something
that I feel very strongly about,
and that is it's Treasury's obligation
to protect the US tax base.
That has been our stance in BEPS.
Whether it was about principle rules,
whether it was about PE rules
that were not gonna take
away that US tax base,
and give it to foreign countries,
whether it was about going on offense
on the digital economy
or other countries wanted
to make it easier to tax our companies.
That has been our stance
in the state aid cases,
whether it was about
taking money that we think
Europe has no right to tax
and taxing it in Europe,
for which they'd be a foreign tax credit.
And that has been our
stance with respect to
the rules on debt and
the rules on inversions.
With respect to inversions, the Secretary
has repeatedly said, that we would use
whatever administrative authority we have
to stop inversions, but that only congress
could act to end in versions completely.
And we have said, we continue to look,
the administration and we continue to look
at other ways that
inversions are happening
and what our authority
might be in that space.
We have put an emphasis
on business tax reform,
as a way to
make our tax system better,
more stable, and keep companies here.
But I do want to have a word of warning.
There are folks, I believe,
that will use the inversion
debate to make the argument
that we should not be doing,
say revenue neutral tax
reform for business,
but that we should be doing
revenue losing tax reform
in the business and corporate space.
And to that, I would simply ask, whether,
the logic of that, is that
the way we will ultimately
stop inversions is to join
and win the race to the bottom
until our rate is the
same as the Irish rate.
Now, you may applaud that
as a wonderful corporate tax policy.
But if you do, you also
have a responsibility,
I think, as Americans
to answer the question,
where the revenue comes from,
to have the budgets that
are reasonably imbalanced,
and that can meet the long term,
fiscally responsible
goals of us as a country.
And as I said, the business groups,
I'm a little fascinated by the fact,
that I get lobbied by people
that say, I just wanna,
I wanna pay less tax, which
shouldn't surprise anyone.
But when you're in the government,
your job is to make the receipts
bear some resemblance to the expenses
in a responsible way
and the administration
has tried to take that view.
So we do need to reform our tax code
to minimize the incentive for inversion,
and I won't go all the
way into the elements
of our business tax reform, but I will say
that the answer to inversions
is not to join the race to the bottom.
So we have ultimately a
zero corporate tax rate
without having the way to get that revenue
so we can do the things we need to do
that are fiscally responsible.
You know, on earnings stripping,
let me just say this, I was, I think that,
I've said in the past,
I might have said it here
two years ago, I forget.
But one of the almost
comical things in this whole
BEPS debate is, you
know, you get the UK DPT,
this extraordinarily complicated device,
to stop from the UKs point of view,
money artificially flowing out of the UK.
And that's because US
highly engineered structures
or other engineered structures
out of these countries
need these kind of very
complicated devices to combat them.
But in the United States,
if you wanted to strip income
out of the United States,
I think we made it easier
than any country in the world.
You just had to dividend
the note, wasn't too hard.
You didn't need any sandwiches
or double this or double that.
And I think it was that
particular phenomenon.
And I'm very interested
to see in the reporting
since our regs came
out, the number of firms
and professional writers who acknowledge
that this was a commonly used technique,
and we saw that phenomenon
and we looked at
all authority under Section 385.
And as I said earlier, it's
our job to protect the fisc.
And we went back to first principles,
and we asked ourselves a question
some of you have probably
asked in practice.
What is the difference
between debt and equity,
when a wholly owned entity dividends
a note up to its parent.
And I think to our credit,
we answered that question,
not just in the case of inversions,
or in the case of stripping
out of the United States,
we looked across our authority,
and we said, you know,
if we think that the
mere issuance of a note
in a circumstance, in which
it typically doesn't look
too different from equity,
exists in this space,
it looks like it exists across the space
and we applied it broadly
in our 385 regulations.
I would add that the,
sum of the quo complexity that we see,
if you follow them through,
when you finally work through
the rest of the regs and the examples
you're gonna see they're
really all variation on a theme
and the variation on the theme,
is just moving notes to regroup,
either for stock or
assets of your affiliates
that do nothing but
shift debt into a place
where there's going to
be more advantageous
to take deductions.
Now, this idea wasn't like something
we all just sat around and thought about.
There's a craft case of the 50s.
And the court was asking
the very same question.
The taxpayer won the case,
and the majority said,
well, you know, what, it's
got the bells and whistles
and the creditor rights,
and it's got a term,
so we'll call it debt, fair enough.
But then when congress came along in 385,
and threw up his hands and said, you know,
these court cases are all over the place.
So we're going to ask you treasury,
go in and look at specific circumstances.
You're not limited by, you
know, particular elements
that have been highlighted in the courts,
and help us distinguish debt and equity.
And I think that's what the 385 rules do
in the dash three space,
and in the dash two space,
it says, if you really want
to treat your affiliates
as separate entities to respect the debt,
how about a piece of
paper here in the air.
That is a type of piece of paper
that third party lenders
might actually use
if we were really going to lend you money.
And those rules are not
really far more than that.
And we've already heard a comment,
we may have missed something
on trade, payables, etc.
And I'll just close on this point.
The Secretary has said very clearly,
that we put these out
as proposed regulations
in the 385 space.
We do not have a kind of
stubborn pride of authorship,
we may have missed things.
We will have an intense comment period,
we'll be listening to taxpayers.
We want to do things that are both
right from a policy point of view,
and also minimize burdens on companies.
But I think to have sat there
and watch this phenomenon go forward
at the cost of US taxpayers
shifting these burdens
from one group of taxpayers,
to those of us who are left behind
whether it's small
businesses, or individuals
did not seem to us to be
a responsible thing to do.
And that's our 385, that's
where we are in inversions.
So I look forward to our debates.
I wanna thank you very much
for your attention today
and appreciate you having me.
(crowd clapping)
