Re: IRS REG–108060–15
On behalf of the members of National Taxpayers Union (NTU), we write to express serious concerns with the regulations issued by the U.S. Treasury Department on April 4, 2016 pursuant to Section 385 of the Internal Revenue Code. These proposed regulations were part of a larger package of rules intended to address the problem of corporate inversions. Unfortunately, they were drafted in an overly broad fashion that would have a negative impact on a vast number of corporations engaging in standard financial management practices. While the full impact of the regulations is still being understood, it is already clear that they would harm the international competitiveness of American businesses and encourage new companies to incorporate on foreign soil instead of in the United States.
NTU urges you to completely withdraw the proposed regulations and instead pursue other options to address the growing corporate inversion problem. However, noting the likelihood that the regulations will not be withdrawn in their entirety, we offer the following recommendations.
Of foremost concern is the broad scope of the proposed regulations, which will impact commonplace financial transactions utilized by most businesses engaged in the global economy. The Business Roundtable, citing figures from the U.S. Bureau of Economic Analysis, estimates that there were 2,243 such companies employing over 23 million workers in 2013. The proposed regulations could have an enormously detrimental economic impact on these companies and workers by, for instance, effectively curtailing or barring the utilization of practices such as “cash pooling” and revolving credit arrangements as well as potentially removing the applicability of some foreign tax credits. This would likely impede legitimate activities, both foreign and domestic, of multinational companies. The net effect of these changes would amount to a tax hike and an increased regulatory burden that hampers competitiveness.
NTU is also concerned that compliance costs could far exceed initial estimates. The Office of Management and Budget projected that aggregate compliance costs for all affected businesses would amount to $13 million. This estimate, however, omitted start-up costs and relied on unrealistic assumptions about labor costs. The true impact will certainly be exponentially higher. Indeed, according to the Business Roundtable, complying with these regulations could require individual companies to expend millions of dollars apiece. In our experience with other tax-related rules, extensive requirements for contemporaneous documentation (as the current regulation envisions) often entail much greater overhead to a business than conventional estimation methodologies can capture.
Yet another major but heretofore uncalculated cost could be the declining health of U.S. companies’ financial statements or credit ratings. By restricting their access to accepted techniques that rely on intercompany cash management, subsidiaries might become more reliant on costlier third-party options.
Before finalizing the regulations, Treasury and OMB should conduct more detailed analyses of the true compliance burdens at stake, along with a more comprehensive economic cost-benefit assessment that takes into account deadweight losses from disruptions to traditional business decision-making approaches.
NTU is further concerned about the effective date of the debt recharacterization rules, which are applicable to debt issued after April 4, 2016 – the date the proposed regulations were made available to the public. This retroactivity has for practical purposes deemed these “Proposed Regulations” as “Final Regulations.” Additionally, because the regulations have impacted behavior immediately upon their issuance, this has almost assuredly reduced the likelihood that public input will receive fair consideration.
At a minimum, we urge you to modify the rules related to debt-equity so that they only affect transactions conducted after the regulations are finalized. We caution, however, that this move will not, in and of itself, relieve all substantial concerns about the timing of tax issues. As a Tax Insights analysis from PricewaterhouseCoopers noted, the IRS audit process that large business taxpayers now disproportionately undergo would present other problems:
The standards to be applied and the limits on the Commissioner's discretion to bifurcate debt instruments are not clear. Complex issues could arise on examination when, after the debt has been outstanding for several years and the principal has been partially paid, the IRS asserts, with the benefit of hindsight, that a given portion of the debt was equity.
Additionally, we believe the proposed regulations could incentivize future businesses entities to opt to incorporate abroad rather than in the United States. This could lead to an escalation of “pre-inversions,” in which new start-ups form overseas rather than in the United States to avoid our increasingly onerous tax and regulatory environment. This threat could be compounded by our outdated worldwide tax system that has locked out corporate earnings and forced businesses to invest abroad instead of bringing profits back to the U.S. where these resources could be used to grow their businesses and create jobs. As it stands, approximately 5 million new firms are established in the United State each year – a number that has unfortunately plateaued in recent years. If we want to continue to foster entrepreneurialism, it is imperative to have a tax and regulatory climate that encourages new businesses to incorporate domestically.
The most prudent path forward would be for the Treasury Department to withdraw the proposed regulations in their entirety and work with Congress and relevant stakeholders to address the problem of corporate inversions in a more straightforward manner. The Treasury has viewed its rulemaking grant under Section 385 expansively, even though the statute has been in near-total disuse for decades on end. Congress also established specific factors the Executive Branch was to weigh in wielding this power. The Treasury’s sweeping assertion through Section 385 is, to many members of the policymaking and practitioner community, controversial at best and problematic at worst.
Short of this prudent action, NTU suggests delaying the finalization of the rules until a thorough economic evaluation can be performed and additional stakeholder information can be collected. This would provide Congress and the general public with a better understanding of the breadth of the impact of the proposed regulations and ultimately lead to better policymaking.
Executive Vice President