International Business Association Seeks Revisions to Proposed
IRS Form 8926

B y Kristen A. Parillo

In comments submitted to the U.S. Treasury Department and the IRS, the Organization for International
Investment (OFII) has suggested revisions to proposed IRS Form 8926 on disqualified interest expense to provide the government with more accurate data on the application of IRC section 163(j) (Earnings Stripping). (For the letter, see Doc 2008-4344 or 2008 WTD 43-18.)

The January 31 letter was recently made public by OFII, a Washington-based business association
that represents the interests of U.S. subsidiaries of foreign-based companies. The group was responding
to a government request for comments on the proposed form, which was drafted as part of Treasury’s
November 2007 report to Congress on earnings stripping, transfer pricing, and U.S. income tax
treaties. (For the Treasury report, see Doc 2007- 26269 or 2007 WTD 230-21.)
In that report, Treasury provided the results of its study on earnings stripping, which involves the
shifting of domestic corporations’ income outside the United States through related-party debt and associated interest payments.

The study focused on the ability of foreign-controlled domestic corporations (FCDCs) to shift income and jobs offshore. Treasury said it did not find conclusive evidence of earnings
stripping by FCDCs that had not inverted, but said there was ‘‘strong evidence’’ that inverted corporations
(U.S.-based corporations that have relocated their headquarters offshore) have engaged in earnings
stripping, primarily through interest payments. Treasury said the evidence suggested that
the section 163(j) rules are not effective at preventing the inappropriate shifting of income outside the
United States in some circumstances. However, because Treasury did not find conclusive
evidence of earnings stripping by FCDCs that had not inverted, it said additional information is
needed to determine how the administration’s budget proposals to amend section 163(j) would affect
FCDCs that have not inverted and whether a modification to the proposals would be appropriate.
To obtain that information, Treasury and the IRS created a new tax form — Form 8926 — on which
companies are to provide information about their section 163(j) computations, including the determination
of debt-to-equity ratio, net interest expense, adjusted taxable income, excess interest expense,
total disqualified interest for the tax year, and the amount of interest deduction disallowed under section
163(j), as well as information pertaining to the related persons receiving disqualified interest.

Concerns

In its letter, OFII voiced concerns about various aspects of the proposed form and urged the government
to revise and reissue it in draft form before finalizing it. OFII noted that under section 163(j), a corporation
will be subject to a limitation on the deduction of interest expense if it has disqualified interest, has
excess interest for the year, and its debt-to-equity ratio exceeds 1.5 to 1. OFII suggested that because
of those rules, a taxpayer should be required to complete only those sections of the form that apply
to them. For example, taxpayers that don’t rely on the debt-to-equity safe harbor should not be required
to complete line 1 of the form, which asks the taxpayer to compute its debt-to-equity ratio.

However, taxpayers that do rely on the debt-toequity safe harbor shouldn’t be required to complete
lines 2-8, OFII said. For those taxpayers, there is no disallowance of interest expense under section
163(j). Consequently, OFII explained, those taxpayers normally don’t perform the computations required
by lines 2-8, that ask for information such as Reprinted from Worldwide Tax Daily as: 2008 WTD 44-9
taxanalysts worldwide tax daily Worldwide Tax Daily 2 (C) Tax Analysts 2008. All rights reserved. Tax Analysts does not claim copyright in any public domain or third party content. net interest expense, excess interest expense, and total disqualified interest for the tax year. Requiring those taxpayers to compute that information would‘‘represent a significant additional administrative burden with respect to items that have no bearing on these taxpayers’ income tax liabilities,’’ OFII said.

Additionally, OFII said, taxpayers that have no disqualified interest or net interest expense should
not be required to file the form at all, because section 163(j) applies only when a taxpayer has disqualified
interest or net interest expense. Another issue, OFII noted in its letter, is that no
draft instructions for the form were issued, even though many of the form’s line items refer taxpayers
to instructions. OFII expressed concern that any instructions that may be provided could conflict with
the proposed regulations issued under section 163(j). OFII noted that those proposed regulations were
issued nearly 17 years ago and contain significant gaps and ambiguities that haven’t been updated or
revised to reflect statutory changes. If the instructions depart from the proposed regulations, an interpretive
dilemma could arise, it said. OFII therefore urged the government not to finalize
the form until draft instructions have been drafted, the instructions have been reconciled with
the proposed regulations, and taxpayers have been given an opportunity to comment on them.
Other concerns addressed by OFII involve issues related to affiliated group filings, the form’s failure
to integrate section 163(j) computations with limitations under other Tax Code provisions, duplicative
reporting requirements, and ambiguity over who is required to file the form.

Revisions Would Yield Better Data

‘‘The new form will provide more data to help policymakers discern how companies are complying
with the law,’’ Todd Malan, president and CEO of OFII, told Tax Analysts. ‘‘But we think the form can
be revised substantially to ensure [that] the data collected is useful.’’ Malan said the changes OFII is suggesting would help the government collect the relevant data for
taxpayers that are covered by section 163(j) and would minimize the administrative burden on companies
that are not using certain parts of section 163(j) provisions. ‘‘There’s no need to create work for
people who, for instance, don’t take advantage of the safe harbor,’’ he said.
‘‘If this form is tweaked a bit and the instructions are robust and thorough, we think policymakers are
going to get a clear picture of the kinds of borrowing that is occurring, its business purpose, and in certain
circumstances, when it may be solely tax motivated,’’ Malan said. ◆

♦ Kristen A. Parillo is a legal reporter with Tax
Notes International. E-mail: kparillo@tax.org