February 2017 edition
Earnings-stripping regulations finalized • U.S. Customs and Border Protection enforcement • State-level privacy and data security actions
Earnings-stripping regulations finalized
Counsel should carefully review the IRS’s new final and temporary earnings-stripping regulations, which fundamentally change the determination of whether certain related-party instruments are debt or equity for U.S. tax purposes.
Under the regulations, certain instruments between members of a corporate group are characterized as equity if:
- The related-party instrument does not meet specified documentation requirements, which apply to intragroup instruments if the stock of any group member is publicly traded, or assets or revenue reported on an applicable financial statement exceed certain thresholds.
- The instrument is distributed to a related party or is issued in certain intragroup transactions (Debt Transaction Rules). Under a per se funding rule, certain related-party instruments are also treated as equity if the instrument is issued within three years before or after specified distributions or acquisitions.
The regulations do not generally apply to debt between members of a U.S. federal consolidated income tax group.
The IRS received numerous comments after it issued controversial proposed earnings-stripping regulations in April 2016. The final and temporary regulations significantly narrow the scope of the proposed regulations. The regulations:
- Do not apply to debt instruments issued by:
- foreign issuers, including foreign subsidiaries of U.S. multinationals;
- S-corporations; and
- most real estate investment trusts (REITs) and regulated investments companies (RICs).
- Relax the documentation rules by postponing the effective date (to debt instruments issued on or after January 1, 2018), and in certain cases allowing a group to rebut the equity treatment of an instrument that fails the documentation requirements.
- Limit the application of the Debt Transaction Rules by:
- broadening exceptions provided in the proposed regulations;
- excluding debt instruments issued by certain regulated financial companies, certain members of regulated financial groups, and regulated insurance companies;
- generally excluding deposits pursuant to a cash pooling arrangement, as well as loans to finance short-term liquidity needs; and
- providing an exception for stock acquired for delivery to employees, directors, and independent contractors as consideration for providing services.
The Debt Transaction Rules generally apply to debt instruments issued after April 4, 2016, and to taxable years ending on or after January 19, 2017. However, a debt instrument will not be recharacterized as equity under the Debt Transaction Rules until immediately after January 19, 2017.
For more information on the new earnings-stripping regulations, see Legal Update, IRS Issues Final and Temporary Earnings-Stripping Regulations.
U.S. Customs and Border Protection enforcement
Counsel for importers should be aware that U.S. Customs and Border Protection (CBP) is implementing stricter enforcement measures under the Trade Facilitation and Trade Enforcement Act of 2015 (TFTEA).
The TFTEA gives CBP greater authority to:
- Investigate allegations of evasion of antidumping and countervailing duty (AD/CVD) orders, which impose additional tariffs on certain imported goods that are sold by foreign suppliers at less than fair value or that benefit from foreign government subsidies.
- Enforce intellectual property rights at the border.
- Prevent products made by forced labor from being imported into the U.S.
CBP’s trade enforcement efforts have taken several forms. For example, in recent months CBP has:
- Issued regulations detailing the formal process it will use to investigate allegations of AD/CVD evasion.
- Sent informed compliance letters to numerous importers encouraging them to review their import transactions and consider filing prior disclosures if violations are discovered. These letters signal that a CBP audit may be forthcoming.
- Increased detentions of shipments suspected to contain goods produced by forced labor.
These enforcement efforts signal that further trade implementing measures are on the way, such as:
- Modification of CBP’s AD/CVD evasion investigation procedures based on comments submitted in response to CBP’s interim regulations. The deadline for submitting comments is December 20, 2016.
- Amendment of CBP’s regulations to reflect the TFTEA’s repeal of the consumptive demand exception to the forced labor prohibition. This exception allowed the importation of goods made by forced labor if domestic production was insufficient to meet U.S. consumptive demands.
Counsel for importers should ensure that their companies:
- Perform internal compliance reviews and determine whether prior disclosure is warranted.
- Conduct supply chain due diligence.
- Prepare for a possible CBP audit.
- Keep up to date on CBP enforcement initiatives.
For more information on import requirements enforced by CBP, see Practice Note, Importing Goods into the US: Overview.
State-level privacy and data security actions
Increasing state-level actions across industry sectors emphasize that companies must ensure they comply with a growing patchwork of federal and state privacy and data security requirements.
New York has announced the country’s most prescriptive cybersecurity regulations to date for financial institutions, specifying organizational structures, technical controls, and aggressive reporting requirements that go beyond federal dictates.
Recent state enforcement actions under the federal Children’s Online Privacy Protection Act (COPPA) include:
- New York settlements with four companies that operate high-profile cartoon and toy-related websites for allegedly violating COPPA by tracking children’s online activities. The settlements totaled $835,000 and imposed significant compliance obligations, including better oversight of third-party service providers and advertising networks.
- A Texas settlement with a mobile app developer for $30,000, including commitments to age-screen children who access its online games and to comply with COPPA requirements.
Other states and federal agencies, including the FTC, continue to highlight data breach reports and investigate companies’ privacy promises and data security measures.
Companies should:
- Understand applicable laws and review their privacy and data security commitments.
- Recognize that cybersecurity requires more than just technical attention and allocate appropriate governance resources.
- Perform regular data security risk assessments and implement reasonable safeguards.
- Understand and closely monitor how their service providers collect, use, and secure personal information, especially for vulnerable populations.
- Maintain records and be able to demonstrate the effectiveness of their privacy and data security programs.
For more information on recent state data security actions, see Legal Updates:
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