The US tax reform legislation (the Act) enacted in late 2017 made important changes that affect financing of US operations of companies not headquartered in the United States. Among the most significant of these changes are the new Section 163(j) limitations on interest expense deductions and the new Section 267A anti-hybrid rules. Now that taxpayers and practitioners have had an opportunity to digest the impact of these changes, this is an excellent time to take a closer look at these provisions, especially with the IRS having published pertinent regulations and other guidance, with more expected in the near future.
The Act had a significant impact on the tax treatment of multinationals with non-US headquarters. While the reduction in the corporate tax rate brings advantages, this reduction must be balanced against the more restrictive earnings-stripping rules of revised Section 163(j), the application of the anti-hybrid rules under Section 267A, the possible impact of the new BEAT, and the Section 385 regulations.
These rules can lead to a denial or deferral of deductions in situations where no such denial or deferral would have occurred under prior law. Therefore, multinationals need to analyze the impact of these provisions and to monitor IRS guidance to determine whether final regulations will have significant differences from proposed regulations.