US Developments Regarding Hybrid Entities And Corporate Tax Shelters - Part 2

Temporary regulations, fleshing out the principles reflected in the examples above, were issued in March 1998. They and Notice 98-11 were the subject of widespread and sustained criticism from US multinationals, the financial markets, practitioners, and members of Congress who considered the Treasury to have overstepped its authority in trying to set policy without the legislature's imprimatur. Criticisms included the following:

• Although the targeted transactions reduced foreign tax, they did not affect total CFC income for US purposes. Total US tax owed on that income remained unchanged because the calculation of a CFC's income before foreign tax is not affected by whether the countries in which the entities in question are located and taxed treat the recipient of the interest as a separate entity and grant the CFC an interest deduction.