Associations' Letter to Taxwriting Leaders on Hybrid Regs

WASHINGTON COUNSEL/ERNST & YOUNG GLOBAL COMPETITIVENESS COALITION

[1] A group of prominent business and trade associations on May 18 sent a letter to House Ways and Means Committee Chairman Bill Archer (R-TX), and Ranking Democrat Charles Rangel (D-NY), and Senate Finance Committee Chairman Bill Roth (R-DE) and ranking Democrat Daniel Patrick Moynihan (D-NY) urging the tax committees to prevent the Treasury Department from issuing regulations to restrict hybrid branches that could prove detrimental to the competitiveness of U.S. multinational corporations.

[2] The letter, signed by 14 trade and business associations demonstrates how broad the concern is among a variety of industries over the prospect that Treasury's issuance of these regulations unilaterally will change fundamental international tax law in a manner that could undermine the ability of U.S. multinationals to compete in the global marketplace. Ironically, the transactions that would be targeted by Treasury's restrictions are undertaken only to reduce foreign taxes -- not U.S. taxes -- paid by U.S. companies.

[3] "Treasury has intimated that it will go through with plans to issue the proposed regulations when it releases its study on current international tax rules. While the business community welcomes an honest and open debate on these issues with Congress and the Treasury, we hope Treasury does not presuppose solutions, such as those in the regulations," said Mark Weinberger, Washington Counsel, PC, on behalf of the Global Competitiveness Coalition, which is comprised of more than 20 U.S. multinational corporations representing a broad cross-section of industries.

[4] "The Coalition would like to see this issue resolved through a cooperative effort on the part of Treasury and the Congress working with the business community so that U.S. business can remain competitive in the global marketplace. We hope that this expression of concern about Treasury's stated course of action from such a variety of trade associations and business groups will encourage a productive dialogue on these issues and provide for a long-term solution," said Phil Moseley, Ernst & Young's National Director of Legislative Services.

[5] Contrary to current congressional initiatives to simplify the international tax regime, Treasury is seeking to launch a major new initiative to change the application of Subpart F and other international tax rules to hybrid transactions. Because this goes to the heart of the competitive considerations underlying the current international tax regime, we believe the Congress is the only proper forum for making such policy decisions.

[6] Any change in long-standing and fundamental tax policies should be made by substantive statutory changes after a comprehensive examination of underlying policy of Subpart F by the Treasury and by the Congress. That examination cannot proceed without prejudice if the anticipated Treasury regulations are permitted to take effect. Therefore, we strongly urge you to include in any tax legislation considered this year a proposal (H.R. 672; S. 572) introduced by Reps. Phil Crane (R-IL) and Bob Matsui (D-CA) and Sens. Connie Mack (R-FL) and John Breaux (D-LA) that would impose a moratorium on Treasury's ability to issue these regulations restricting the use of hybrid arrangements by U.S. multinational corporations.

American Electronics Association

[7] The undersigned trade and business organizations are writing to urge you to act to prevent the Treasury Department from usurping the legislative process and unilaterally changing fundamental international tax law in a manner that we believe will further undermine the ability of U.S. multinationals to compete in the global marketplace.

[8] Our concern relates to Treasury Department's announced intention to issue regulations pursuant to Notice 98-35 that restrict hybrid branches (i.e., entities treated as corporations under one country's tax system and as branches or partnerships in another). Last year, bipartisan congressional opposition convinced the Treasury to withdraw regulations which had been issued pursuant to a predecessor notice, Notice 98-11, and prevented Treasury from obtaining a request for broad regulatory authority in this area.

[9] Congress raised both procedural and substantive arguments for its opposition to Notice 98-11. Notice 98-35 and the regulations to be issued thereunder contain the same fatal flaws. The regulations promised under Notice 98-35 will be substantially similar to those issued pursuant to Notice 98-11. Those regulations presuppose a substantive policy conclusion that is not supported by current statute.

[10] Treasury's regulations -- if allowed to take effect -- will create a "chilling effect" on the ability of U.S. multinationals to enter into transactions in the ordinary course of business. The hybrid branch rules announced in Notice 98-35 will prevent U.S. multinational businesses from employing strategies that permit them to fund their active business operations in an efficient manner. Foreign multinationals generally are not subject to the constraints that the U.S. tax code imposes upon U.S. companies and thus are able to fund their overseas operations in a more cost efficient manner.

[11] The Notice and its promised regulations squarely present the issue whether the Congress or the Treasury should determine U.S. tax policy in the international arena.