Buchanan Ingersoll & Rooney Tax Counsel Herman B. Bouma was "taken aback" by the IRS' new bright-line 25 percent test for determining whether businesses have substantial business activities in foreign jurisdiction.

“I think it was very surprising and I do find it rather bizarre,” Bouma told Bloomberg/BNA Tax Management. “In a lot of cases it would be pretty hard to meet.” It is an “arbitrary rule,” he explained, and one that “could be challenged as not being a reasonable interpretation of the statute.”

Moving forward, Bouma said, the government should reinstate the facts and circumstances test, and it should consider other safe harbors. "The first safe harbor would apply where the foreign parent corporation is incorporated in a country with which the United States has a comprehensive income tax treaty within the meaning of §1(h)(11)(C)," the article explained. "In that case, the safe harbor percentage would equal the lesser of (1) 10%, or (2) the ratio of the gross domestic product of that country to the total GDP of the countries in which the expanded affiliated group has operations."

Bouma's second suggestion would simply use a safe harbor percentage of 10 percent, applicable where the foreign parent corporation is not incorporated in a country with which the United States has a comprehensive income tax treaty.