John Staples, assistant IRS commissioner (international), questioned at a conference in Washington in December whether one of the structures works. A US parent company borrows in the United States and makes a loan to a subsidiary in the United Kingdom that is “disregarded” for US tax purposes — in other words, the subsidiary is treated as if it does not exist. The UK subsidiary claims an interest deduction against its UK tax base. “Dual consolidated loss” rules in the US normally bar US corporations from claiming essentially the same deduction in both the US and a foreign country, but the US parent argues these rules do not come into play since the interest deduction claimed in the UK is not the same deduction claimed in the United States. Staples said, “I think this really does give us some concern.”

Lee Sheppard, a contributing editor of Tax Notes magazine, took aim at another structure in an article in late December. The other structure involves a joint venture formed in the US between a US and foreign partner. The joint venture is treated as a “reverse hybrid” — as a corporation for US tax purposes but as a partnership for tax purposes where the foreign joint venture partner resides. The joint venture borrows. It deducts its interest payments in the United States. The foreign partner also deducts its share of the interest payments in its home country.

Sheppard argues that new rules the IRS proposed in late November to attack “extraordinary transactions” that exploit “check-the-box” regulations should apply to this transaction. (See “IRS Moves to Limit Certain Foreign Tax Planning” in the December 1999 issue of the NewsWire for prior coverage.)