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CONGRESS STOPS IRS MEASURE TO CHANGE TAX POLICY

NEW YORK-The Treasury Department and the Internal Revenue Service decided last month to postpone until Jan. 1, 2000, final regulations to implement a controversial measure known as IRS Notice 98-11.

The IRS issued the notice in February to advise of a pending rule making to curtail overseas transactions it believes are designed primarily to avoid paying U.S. taxes.

The notice focused on hybrid branches, which are part of so-called controlled foreign corporations based in the United States. The agency seeks to prevent American multinational companies from using hybrid branch arrangements to reduce their foreign taxes while, at the same time, reducing their domestic income subject to U.S. taxes.

The proposed new rule would have applied only in cases where the result is that the foreign tax on the hybrid entity is significantly lower than the U.S. rate.

Wireless carriers and manufacturers increasingly are serving the global marketplace as foreign countries privatize their telecommunications networks and as U.S. companies expand their systems abroad.

Industry coalitions led by large accounting firms, including Deloitte & Touche, Ernst & Young and Price Waterhouse L.L.P., lobbied against Notice 98-11.

These coalitions gained the attention of at least two members of Congress, U.S. Representatives Bill Archer, chairman of the House Ways and Means Committee, and Charles Rangel, ranking Democrat on the same committee.

Saying that such issues should be resolved through law rather than administrative decrees, Archer had called on the Treasury Department to “submit a comprehensive and detailed legislative proposal reflecting your specific policy objectives in this area … accompanied by a detailed economic and tax policy analysis of the proposed … change and the ramifications for the ability of American businesses to compete in world markets.”

Following the June withdrawal of IRS Notice 98-11, Archer said, “I look forward to working with the Treasury Department and other interested parties to achieve a permanent resolution of the matter, with particular focus on the impact of U.S. tax policy on the ability of U.S. businesses to compete in global markets.”

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