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German Manufacturers 'Deeply Concerned' About Debt-Equity Regs

JUN. 23, 2016

German Manufacturers 'Deeply Concerned' About Debt-Equity Regs

DATED JUN. 23, 2016
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To

 

Internal Revenue Service (IRS)

 

Department of the Treasury (TREAS)

 

Date, 2016-06-23

 

 

ZVEI comments on the debt-equity regulations under Internal Revenue Code section 385

Dear Sir and Madam,

ZVEI refers to the proposed 385 regulations, released by the Treasury Department on April 4, 2016. We would like to thank you for the possibility to provide our comments that allow us to engage with you on these important issues. On behalf of our members, we are writing to express deep concerns over these proposed regulations. They would, if they became final, severely impact the ability of European companies to invest in the US and maintain normal financing activities.

Therefore, we respectfully request to thoroughly review and redraft the proposal in a number of areas, taking into consideration the following suggestions and remarks:

  • The per se reclassification of debt into equity is not compatible with double taxation treaties and should therefore be withdrawn.

  • The documentation of certain instruments upon issuance and over the life of the instrument, should be reviewed and considerably narrowed.

  • In order to aid transition, to the new rules, we strongly recommend changing the effective date for the proposed debt-equity recharacterization rule. We suggest this new rule does not apply to debt instruments that are issued on or after April 4, 2016, but instead applies to debt instruments that are issued 90 days after the proposed regulations are finalized.

  • Finally, given the complexity of these proposals, we advise extending the public comment period from July 7, 2016, to at least October 5, 2016.

 

We kindly understand that this initiative is driven by the idea to fight abusive and aggressive tax structures in order to safeguard and protect the idea of a fair and equal tax system for every taxpayer and collect tax revenue to fullfil its governmental and social responsibilities. We fully support this goal.

Nevertheless we see these complex regulations influencing US-companies as well as European enterprises operating abroad. Our aim is to address certain points that lead to disproportionate negative effects for multinational enterprises.

Against this background we are concerned that the drafted treasury regulations in the United States will severely impact the ability of European companies to invest in the US and maintain normal financing activities. Therefore we would like to thank you again for the possibility to provide our comments that we have limited to some general issues of the draft:

  • The proposed regulations would prohibit normal integration transactions undertaken for non-tax business reasons.

  • The proposed regulations would recast to equity intercompany debt issued by any affiliate in any country which paid a dividend or made another corporate distribution exceeding its current earnings and profits.

  • Centralized cash pooling of group companies as commonly practiced would no longer be viable -- or, at the very least, U.S. affiliates and CFCs under them, would need to be excluded. Further, pooling of group funds through a group Treasury Center would expose participants to potential risks resulting a chain of consequences stemming from just one participant engaging in a transaction considered "tainted" under the regulations.

  • The proposed regulations would impose harsh penalties for failure to meet documentation requirements that Serve No Business Purpose.

  • Finally we see the 90-day comment period combined with the April 4 effective date as not sufficiently long for a taxpayer to assess the impact on its financing structure and determine whether it needs to alter its financing structures in order to be compliant with the proposed regulations.

 

ZVEI -- Germans Electrical and Electronic Manufacturers' Association -- represents over 1,600 companies of the electrical industry in Germany. Its members include global players, medium-sized and family-owned companies. The sector employs 849,000 people in Germany as well as more than 677,000 employees abroad. The basis of the association's work is the exchange of experience and views between the members about current technical, economic, legal and socio-political topics. With proposals on research, technology, environmental protection, education, and science policy, the ZVEI is a pacemaker of technological progress. It supports market-related international standardisation work.

We appreciate your attention to this important issue and look forward to hearing from you.

Sincerely,

 

 

Dr. Klaus Mittelbach

 

Chief Executive Officer

 

 

Dr. Patricia Solaro

 

Executive Board Member

 

 

ZVEI

 

Germany
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