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Chamber of Commerce Suggests Tax Reform to Stop Inversions

DEC. 4, 2014

Chamber of Commerce Suggests Tax Reform to Stop Inversions

DATED DEC. 4, 2014
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From: Harris, Caroline charris@uschamber.com

 

Sent: Wednesday, December 03, 2014 2:32 PM

 

To: Notice Comments

 

Subject: US Chamber comments on Notice 2014-52

 

Attachments: 141201_Comments_InversionsRegulation_IRS_FINAL.pdf

 

 

Please find comments attached. Hard copy to be delivered via USPS. CLH
Caroline L. Harris

 

Chief Tax Policy Counsel and

 

Executive Director of Tax Policy

 

U.S. Chamber of Commerce

 

1615 H Street, NW

 

Washington, DC 20062-2000

 

202-463-5406 (Direct)

 

202-384-3755 (Mobile)

 

charris@uschamber.com

 

Statement

 

of the

 

U.S. Chamber

 

of Commerce

 

 

ON: Notice 2014-52, Rules Regarding Inversions and Related Transactions

TO: The Department of the Treasury and Internal Revenue Service

DATE: December 4, 2014

The U.S. Chamber of Commerce is the world's largest business federation representing the interests of more than 3 million businesses of all sizes, sectors, and regions, as well as state and local chambers and industry associations. The Chamber is dedicated to promoting, protecting, and defending America's free enterprise system.

More than 96% of Chamber member companies have fewer than 100 employees, and many of the nation's largest companies are also active members. We are therefore cognizant not only of the challenges facing smaller businesses, but also those facing the business community at large.

Besides representing a cross-section of the American business community with respect to the number of employees, major classifications of American business -- e.g., manufacturing, retailing, services, construction, wholesalers, and finance -- are represented. The Chamber has membership in all 50 states.

The Chamber's international reach is substantial as well. We believe that global interdependence provides opportunities, not threats. In addition to the American Chambers of Commerce abroad, an increasing number of our members engage in the export and import of both goods and services and have ongoing investment activities. The Chamber favors strengthened international competitiveness and opposes artificial U.S. and foreign barriers to international business.

Positions on issues are developed by Chamber members serving on committees, subcommittees, councils, and task forces. Nearly 1,900 business people participate in this process.

These comments are submitted in response to Notice 2014-52, Rules Regarding Inversions and Related Transactions (the "Notice").

THE REAL INVERSION SOLUTION: COMPREHENSIVE TAX REFORM

The Notice fails to address the core problem that has led to the increase in inversions: the broken U.S. tax code which employs an antiquated worldwide system of tax at the highest rate among industrialized nations. The benefits of moving to a country with a territorial system and lower tax rate will remain even if the proposed rules contemplated by the Notice are implemented.

Rather than adopt punitive rules intended to stem the tide of inversions, the United States should instead follow the example of the United Kingdom. That country successfully addressed its inversion problem by replacing its worldwide system of tax with a territorial system and lowering its tax rates.1

While the Notice may deter some inversions, others will continue to take place because the value of the inversion exceeds the U.S. tax cost and will benefit the company in the long run. Fundamental tax reform that moves to a more competitive international tax system with lower rates is the only sure way to curb inversions.2

IMPACTS OF THE NOTICE

Lock-Out Effect

The rules contemplated by the Notice intend to limit the ability of companies to invert, in part by restricting inverted companies' ability to access accumulated cash in the former U.S. foreign subsidiary without paying tax to the United States. This limitation essentially preserves the U.S.'s worldwide system of taxation, exacerbating the lock-out effect and ensuring U.S. companies with overseas cash never move this capital back to the United States, where it could be used toward investment, job creation, and research and development (R&D) within our borders.

Takeover Targets

While the proposed rules contained in the Notice will not stop inversions entirely,3 they nonetheless have negative economic impacts. In addition to locking capital out of the United States, should the proposed rules contained in the Notice take effect, they will make U.S. companies takeover targets for foreign firms and encourage new businesses to incorporate overseas in order to avoid the antiquated U.S. worldwide system and high tax rates.4 In short, the rules could cause reductions in U.S. employment, investment, and exports.

Increased Complexity and Compliance Burdens

The Notice adds increased complexity to the United States' already outdated tax code. By facilitating disparate treatment between foreign companies based on whether they are historically foreign, inverted prior to September 22, 2014, or inverted on or after September 22, 2014, and creating new and burdensome rules and restrictions based on those arbitrary designations, the Notice moves the U.S. tax system in entirely the wrong direction.

Increased complexity brings increased compliance costs. Application of these rules complicates attempts by American worldwide companies to level the global playing field. Additionally, since the Notice does not shut down inversions, but simply makes them more complicated to execute, taxpayers will look to restructure both their attempted inversion transactions as well as post-inversion arrangements so as to avoid these transaction-specific rules.5

Punitive Industry Impact

The Notice, for reasons which appear intentional in design but which are unclear as to policy basis, punitively singles out the foreign reinsurance industry, making it nearly impossible for foreign reinsurers to participate in inversion transactions and making stock acquisitions of U.S. companies by foreign reinsurers all but impossible without triggering adverse tax consequences.

By adopting an exception to the "cash box rule" for foreign insurance companies that references an insurance exception found in the controlled foreign corporation (CFC) rules, rather than the more liberal passive foreign investment company (PFIC) active insurance exception, the Notice has significant detrimental impacts for these foreign insurers. They are basically precluded from engaging in an inversion transaction and any attempt by a large or "whale" foreign insurer of a "minnow" U.S. corporation in exchange for its stock brings with it the risk of the being treated as a U.S. taxpayer, and, as such, subject to the U.S.'s worldwide system of international taxation.6

It is unclear why a rule that is punitive to foreign reinsurers was adopted in the Notice and whether the IRS has reviewed all the possible impacts of such rule. The Chamber strongly opposes this industry punitive tax treatment.

CHAMBER RECOMMENDATION

Neither the Notice nor the rules proposed therein address the root cause of inversions. The most effective solution to stop inversions is the enactment of comprehensive tax reform that includes a competitive international income tax system, lower tax rates, and that encourages capital investment in the United States. The proposed rules simply would make some inversion transactions less profitable, make U.S. companies sitting ducks for foreign takeovers, add complexity to the Code, create onerous compliance burdens for taxpayers, and punitively single out one industry for detrimental treatment. For these reasons, the Chamber recommends that the Notice be withdrawn and that Congress be allowed to continue its work towards comprehensive tax reform.

 

FOOTNOTES

 

 

1See, e.g., McBride, "Tax Reform in the UK Reversed the Tide of Corporate Tax Inversions," Tax Foundation (10/14/14), available at http://taxfoundation.org/article/tax-reform-uk-reversed-tide-corporate-tax-interversions.

2 A copy of the Chamber's Principles for Comprehensive Tax Reform is attached to these comments and incorporated herein by reference. See also Katz, Rubin, & Cook, "Lew Says Treasury Can Act to Reduce Inversions' Value," Bloomberg (9/9/14), available at http.//www.businessweek.com/news/2014-09-09/lew-says-treasury-can-act-to-reduce-inversions-value (quoting Treasury Secretary Jack Lew indicating that the real answer to the inversion problem is "tax reform, because as long as we have a system where the United States has the highest statutory tax rate in the developed world . . . it creates a very bad incentive.").

3See Gleckman, "Treasury's New Rules May Slow, But Won't Stop Corporate Tax Inversions," Forbes (9/23/14), available at http://www.forbes.com/sites/beltway/2014/09/23/treasurys-new-rules-may-slow-but-wont-stop-corporate-tax-inversions/.

4See Portman, "Love Your Country, Reform Its Tax Code," Bloomberg (10/24/14), available at http://www.bloombergview.com/articles/2014-10-24/love-your-country-reform-its-tax-code (Senator Portman notes that the "companies that the regulations would keep at home are becoming foreign takeover targets."); Rushton & Roland, "New US tax inversion rules usher in era of forced 'economic patriotism'," The Telegraph UK (9/28/14), available at http://www.telegraph.co.uk/finance/personalfinance/tax/11125557/New-US-tax-inversion-rules-usher-in-era-of-forced-economic-patriotism.html (quoting Michael Mandel, chief economist at the Progressive Policy Institute, who concludes that this Treasury action "encourages activist investors and foreign companies to work together to make takeover bids for US multinationals with large amounts of cash outside the country . . . No company, no matter how large, would be safe."). See also White, Dixon, & Faler, "Democrats' whopper of a strategy flop," Politico (9/12/14), available at http://dyn.politico.com/printstory.cfm?uuid=6F85147B-3A59-464D-92C2-A7F358518A32 (noting Ohio Senator Rob Portman stating that one off attempts to curb inversions "make companies even less competitive" and threaten to lead to "more foreign takeovers,"); Wall Street Journal Editorial Board, "Jack Lew's Flee America Plan," Wall Street Journal (7/17/14) (noting "Mr. Lew also doesn't understand that foreclosing inversions would only make U.S. firms more vulnerable to foreign takeovers. If executives can't reduce their tax disadvantage by moving abroad, more of them will choose to serve shareholders by offering to be purchased by foreign firms that have a lower world-wide tax rate. And even if CEOs resist a foreign offer, shareholders might prefer the higher after-tax return on their investment. Who's the real Benedict Arnold of tax policy here?"); Graetz, "Inverted Thinking on Corporate Taxes," Wall Street Journal (7/16/14) (noting that one-off anti-inversion proposals "would do nothing to make the U.S. a more favorable place to locate multinational headquarters or investments. If they succeed -- which is unlikely, given the creativity of tax planners and the potential large tax savings at stake -- the most likely outcome will be more foreign takeovers of U.S. companies.").

5See, e.g., Kelly, "Medtronic profit meets expectations; Covidien deal on track," Reuters (11/18/14), available at http://www.reuters.com/article/2014/11/18/medtronic-results-idUSL.2N0T80O120141118 (noting that "[n]ew U.S. tax rules aimed at deterring tax inversion deals mean Medtronic will need to borrow more money than it originally planned, rather than use overseas cash, to fund the deal.")

6See Davis, Polk, & Wardell LLP, "Recent Anti-Inversion Guidance Has Meaningful Implications for Insurance Companies," available at http://www.davispolk.com/resources/all?field_pb_publication_type_tid_1%5B%5D=5898&field_pb_related_services_target_id=All&field_pb_rel_offices_target_id=All&created%5Bmin%5D=&crcated%5Bmax%5D=&fleld_at_last_name_value=&nid=&nid_1=&body_value=&title=sort_.

 

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