Menu
Tax Notes logo

State Chamber of Commerce Criticizes Breadth of Debt-Equity Regs

JUN. 22, 2016

State Chamber of Commerce Criticizes Breadth of Debt-Equity Regs

DATED JUN. 22, 2016
DOCUMENT ATTRIBUTES

 

June 22, 2016

 

 

The Honorable Jacob Lew

 

United States Treasury Secretary

 

U.S. Department of the Treasury

 

1500 Pennsylvania Ave., N.W.

 

Washington, D.C. 20220

 

 

Dear Secretary Lew,

On behalf of the Michigan Chamber of Commerce ("Michigan Chamber"), I appreciate the opportunity to submit brief comments with respect to proposed regulations under Internal Revenue Code Section 385 (Reg. 108060-15) that were issued on April 4, 2016. The regulations propose to dramatically change basic tax principles and case law with respect to the treatment of debt versus equity and would significantly increase the cost of doing business for Michigan companies.

The Michigan Chamber represents over 6,800 job providers statewide including businesses from every industry sector, ranging from small sole proprietors to many large, domestic and multi-national companies that are doing business globally every day. We are extremely concerned with the impact that the proposed regulations will have on companies' ability to conduct normal course business activities such as the day-to-day funding and cash management for any subsidiary or affiliate that is outside of a U.S. consolidated group. These regulations arguably represent the one of the most significant tax law changes for multinational businesses in the past several decades and, therefore, we take issue with the very short comment period and with the focus on moving forward with regulations that will have consequences way beyond that ever imagined or intended by the Treasury Department. Similar to other organizations, we respectfully request a 90-day extension to the comment period, which currently ends on July 7, 2016, so that companies and Treasury can analyze the various unintended consequences of the regulations in an effort to produce regulations that make sense and do not penalize ordinary course business transactions.

 

1) The Michigan Chamber does not condone or condemn any recent actions by companies who are engaged in "inversions" for the purpose of minimizing their tax liability. We cannot blame them for doing so as it is a consequence of our fundamentally flawed international corporate tax system. The focus of our comments is on the overly-broad nature of these proposed regulations and the fact that these regulations will penalize normal ordinary course business transactions that have nothing to do with inversion transactions or U.S. tax avoidance. The regulations will treat legitimate debt as equity and accordingly will jeopardize interest deductions for U.S. based job providers, will cause repayment of debt to create taxable income and can result in lost foreign tax credits for taxes paid by foreign affiliates and therefore cause double taxation. In other words, a significant, unexpected, and unfair tax increase will occur for all global businesses that have any connection to the U.S. whether it be a foreign owned U.S. company or a U.S. based multinational corporation with operating subsidiaries in foreign countries. One particular area that is directly impacted by the regulations is the cash management activities related to foreign subsidiaries and affiliates. Efficient cash management practices include inter-company lending and daily "sweeps" of cash in order to re-distribute daily cash among foreign subsidiaries and affiliates either in the same country or within the same region (i.e. Europe, Asia, etc.). These are legitimate business practices that help global companies efficiently manage their daily working capital needs. These legitimate practices would be severely hindered by the regulations, putting at risk the continued growth of U.S. generated investment, increasing working capital costs and further decreasing the attractiveness of the U.S. as a place to establish a global business. Cash management arrangements are simply a good business practice, not a tax avoidance technique.

2) Chamber members indicate that the proposed regulations are so open-ended and vague that any given practitioner can glean different interpretations from a variety of the proposed rules. In addition, there are so many adverse consequences to normal business transaction that if these regulations remain in their current states, it will prove to be disastrously costly to job providers, and will likely result in a protectionist and cautious attitude towards investment and result in stunted economic growth.

3) The excessive documentation required for rationalizing what are totally legitimate transactions is unfair, stifling and will result in excessive costs for a non-value added activity. Furthermore, the non-rebuttable presumption that nearly every transaction is a nefarious one is simply offensive, suggesting a guilty-before-proven-innocent mentality. This is no way to treat U.S. job providers.

 

In summary, these broad, overreaching rules will make it more difficult for U.S. companies to compete with foreign-based competitors, and avoids the real issue of making our U.S. tax rates and international tax system competitive. Instead of addressing these fundamental issues, the regulations are actually a step in the opposite direction by making it even more costly and burdensome to be a U.S. company.

We strongly urge at minimum an extension of time for comments. However, a major reexamination and meaningful discussion with affected companies of the purpose and direction of these rules would be more appropriate. The heart of the problem is a corporate tax rate and international tax system that is so onerous that it, in effect, penalizes and discourages job providers from establishing a corporate headquarters or other presence in the U.S. The Michigan Chamber is in support of tax reform. However, it should be done in a comprehensive way that includes a path to making it more attractive, not less, to keep profits, people, and capital in the U.S. The proposed regulations are tilted only towards punishing companies for their efforts to stay viable in an increasingly global marketplace.

Sincerely,

 

 

Richard K. Studley

 

President & CEO

 

Michigan Chamber of Commerce

 

Lansing, MI

 

cc:

 

Michigan Congressional Delegation
DOCUMENT ATTRIBUTES
Copy RID