Coalition Urges Treasury to Withdraw CFC Hybrid Transaction Regs

A coalition of U.S. companies has urged Treasury to withdraw Notice 98-11, 1998-6 IRB 13, and the accompanying regulations on the tax treatment of hybrid branch arrangements. (For a summary of Notice 98-11, see Tax Notes, Jan. 26, 1998, p. 419; for the full text, see Doc 982983 (6 pages), or H&D, Jan. 20, 1998, p. 571; for a summary of the accompanying regs, see Tax Notes, Mar. 30, 1998, p. 1616; for the full text, see Doc 9810159 (35 pages), or H&D, Mar. 24, 1998, p. 3619.)

The coalition, which includes Merrill Lynch, Safeway, Xerox, and Kimberly-Clark, among others, insists that the regs will affect their abilities to compete in foreign markets. Moreover, it adds, Treasury issuance of the notice and the regs amounts to an unauthorized attempt to "legislate through regulations." "Congress, not Treasury or the IRS," the coalition maintains, "should determine the international tax policy issues related to the treatment of hybrid transactions."

====== FULL TEXT ======

April 17, 1998

The Honorable Robert E. Rubin

Dear Mr. Secretary:

[1] We, the undersigned companies, are members of a broad- based coalition of U.S. companies opposed to recent Treasury regulations affecting the taxation of controlled foreign subsidiaries (CFCs) of U.S. companies, like ours.

[2] As you know, on March 23, 1998, the Treasury Department issued temporary regulations under Internal Revenue Service Notice 98-11 despite receiving correspondence from both House Ways and Means Committee Chairman Bill Archer, and the panel's ranking Democrat, Charles Rangel, expressing concerns about Notice 98-11.

[3] Subsequently, the Senate Finance Committee reported out the Internal Revenue Service restructuring bill March 31 with a provision placing a 6-month moratorium on the enforcement of IRS Notice 98-11 and the accompanying regulations. The panel also included a "sense of the committee" provision stating that Treasury and the IRS should withdraw Notice 98-11 and the regulations issued thereunder.

[4] We urge you to agree to the Finance Committee's request and withdraw Notice 98-11 and the accompanying regulations. We believe strongly that Treasury should not legislate through regulations in this area. Congress, not Treasury or the IRS, should determine the international tax policy issues related to the treatment of hybrid transactions.

[5] Without any legal authority to do so, the regulations amend existing law by taxing our companies currently on profits of our CFCs that use hybrid entities to reduce their foreign income taxes. A hybrid entity is a branch or partnership for U.S. tax purposes that is treated as a separate taxable entity for foreign tax purposes. As part of the President's FY 1999 budget, Treasury also has asked for broad authority to issue additional anti-competitive regulations.

[6] The Notice 98-11 regulations impede the ability of our companies and CFCs to compete effectively in foreign markets. They do so either by forcing our CFCs to pay higher (excess) foreign income taxes that cannot be credited against U.S. income taxes or by forcing us to pay U.S. tax currently on the CFCs' profits. By contrast, our foreign multinational competitors will continue to use hybrid transactions to avoid paying excess foreign taxes in a foreign country while not paying any taxes currently on those profits to their home countries, creating a significant competitive disadvantage for U.S. companies.

[7] We urge you to withdraw the new regulations until Congress has reviewed this legislative issue. If you have any questions, please call any of the following Deloitte & Touche Notice 98-11 Coalition contacts: Mike Cooper (202) 879-4905, Clint Stretch (202) 879-4935, Gary Melcher (202) 879-4913, or Mark Garay (202) 879-4989.

[8] Thank you for your attention to this matter.

Automatic Data Processing, Inc.