Tax havens are expected to come under fire next year in reports by the organization for economic cooperation and development (OECD) and a special tax force on money laundering of the G-7 countries.

The OECD is working on a report, to be issued early next debt instrument called “debt exchangeable into common shares.”

Section 263(g) of the US tax code requires that interest paid on one leg of a “straddle” must be capitalized and treated as tax basis in the other leg. Jeffrey Maddrey, an attorney-adviser at Treasury, said at an American Bar Association meeting in August that the government believes it can use section 263(g) to disallow interest deductions on PHONES. He made the same statement about DECS earlier in the summer.

Maddrey believes the IRS would have trouble applying section 263(g) retroactively and favors having the IRS clarify its regulations first and then apply the statute prospectively.The Clinton administration asked Congress in the last two budgets to “clarify” application of the straddle rules to structured financial transactions involving corporate stock. Congress did not act on the proposal.