The Trump administration has opened a critical window to revisit burdensome tax regulations through Executive Order 14219, which directs federal agencies to identify and repeal rules that exceed statutory authority or impose unjustified compliance costs. This deregulatory initiative offers an important opportunity to promote a more competitive tax environment for businesses operating in the United States.
GBA has responded by submitting detailed recommendations to the Treasury Department, identifying several tax rules that undermine their statutory framework and discourage foreign direct investment (FDI). These rules create unnecessary complexity, increase compliance costs, and send a chilling signal to global companies looking to expand in the U.S. market. GBA continues to advocate vigorously for reform or withdrawal of these provisions.
Stock Buyback Excise Tax
The Inflation Reduction Act created Section 4501, which imposes a 1percent excise tax on stock buybacks by publicly traded U.S. corporations and, under certain circumstances, by U.S. subsidiaries repurchasing the publicly traded shares of their foreign parents. While narrowly drafted in the statute, Treasury’s implementing guidance has broadened the tax’s scope in problematic ways.
In December 2022, Treasury published Notice 2023-2, which was followed in April 2024 with Proposed Regulations that significantly expanded the application of the excise tax to foreign corporations by creating a “funding rule”. Under the funding rule, a U.S. corporation would be is treated as acquiring foreign parent stock (triggering the tax) if the U.S. corporation funds by any means a foreign parent’s own stock buyback and such funding is undertaken for a principal purpose of avoiding the excise tax. If a principal purpose of a payment is to fund, directly or indirectly, a repurchase, then with respect to that payment, there is a deemed principal purpose of avoiding the excise tax.
Under this funding rule, any payment from a U.S. corporation to its foreign parent would potentially be deemed to fund the foreign parent buyback with the principal purpose of avoiding the excise tax, resulting in the imposition of the tax.
Consequently, the funding rule potentially implicates ordinary course business transactions conducted by all multinational corporations, such as dividends and loan payments, despite the fact that such payments from U.S. subsidiaries to foreign parents are necessary and are made for valid business reasons that are completely and wholly unrelated to any U.S. tax considerations.
Section 4501 specifically applies if a U.S. corporation actually purchases foreign parent stock. There is no concept of any funding rule in the statute. Consequently, GBA has led the charge in opposing this expansive interpretation.
GBA filed comment letters in response to the Notice and the Proposed Regulations, testified in person against the funding rule in the Proposed Regulations and submitted a letter in accordance with Executive Order 14219 requesting removal of the funding rule.
Section 385 Final Regulations
Originally finalized in 2016, the Section 385 regulations were intended to prevent excessive interest deductions by treating certain related-party debt instruments as equity. While Treasury has since withdrawn the documentation requirements, the more onerous “Per Se Recast Rules,” which treat certain debt instruments as per se equity regardless of taxpayer intent, remain in place.
Treasury indicated an expectation that Congress would address the remaining Section 385 regulations through tax reform. Subsequently, the Tax Cuts and Jobs Act of 2017 undercut the need for the regulations by subjecting interest deductions to the BEAT and section 163(j). The rationale for maintaining Section 385’s harsh rules has therefore evaporated, but the regulations remain in place.
Treasury should follow through on its earlier commitment to eliminate the Per Se Funding Rule, as outlined in its 2019 advance notice of proposed rulemaking, and ensure that withdrawn provisions are not inadvertently revived.