Aluminum Association Seeks Withdrawal of Proposed Debt-Equity Regs

The Aluminum Association (the "Association") thanks the IRS for the opportunity to provide comment on the recent Proposed Rule -- Treatment of Certain Interests in Corporations as Stock or Indebtedness as noticed at 81 FR 20912 on April 8, 2016 which proposes new regulations implementing the provisions of Section 385 of the Internal Revenue Code. The Aluminum Association, based in Arlington, VA, represents US and foreign-based primary producers of aluminum, aluminum recyclers and producers of fabricated aluminum products, as well as industry suppliers. Association member companies operate under a variety of ownership structures, many of which would be affected by the proposed regulations regarding when an interest in a corporation is treated as stock or indebtedness for IRS tax code purposes. Therefore, the Association is providing comments on the proposed rule as follows below.

The Association has serious concerns about the proposed Section 385 regulations released by the Treasury Department on April 8, 2016, which give the Internal Revenue Service (IRS) wide latitude to unilaterally treat a company's related party debt as equity. While the proposal was released as part of a package of guidance designed to curb cross-border mergers (e.g., inversions), these overly broad regulations go well beyond inversions and will threaten legitimate and well-established business practices, from corporate reorganizations to day-to-day cash management activities to business portfolio decisions and investment in plant and equipment.

The Association believes that, if finalized, the regulations will create a significant burden for multinational groups to effectively deploy and utilize their own cash for or from U.S. operations and companies. This will force companies to rely more on third party debt or equity, which is much more expensive. Moreover, the regulations also would apply to many wholly domestic corporate groups. By restricting the use of intercompany debt, the proposed regulations create a tremendous burden on the financing functions of U.S. companies, dramatically increasing their borrowing costs. This creates a serious disadvantage for U.S. investment relative to global investment, and makes the United States less competitive in the global economy, exacerbating the competitive disadvantage created for many manufacturers in the United States by the high U.S. corporate tax rate and the out-of-date system for taxing foreign earnings.

In addition, the uncertainty created by the rules makes prudent business planning difficult. These unclear and sometimes ambiguous rules will create more uncertainty for companies in the United States. These are the most wide-ranging regulations proposed regarding this topic in the past 20 years, overturning 80 years of case law and nullifying existing tax provisions enacted with bipartisan Congressional support. Piecemeal changes like these to our current system, particularly those made through regulations without open consideration and debate, make a bad system even worse.

There is a better way forward, however. The Association believes that pro-growth tax reform, not stealth tax increases as contemplated by this proposal, is the solution. Instead of focusing on punitive new rules, policy makers should work together to advance pro-growth, pro-competitiveness tax reform that ultimately makes the United States the best place in the world to manufacture and invest, creating new jobs for American workers and generating sustainable economic growth.

Therefore, given the significant negative impact the regulations will have on a wide range of global and domestic aluminum manufacturers in the United States and the fact that there is a better way forward, we respectfully request that the Treasury Department withdraw the proposal as noticed on April 8, 2016 at 81 FR 20912.

The Association is also a member of the National Association of Manufacturers (NAM) and in addition to the concerns noted in the comments above, the Association also endorses NAM's comments submitted under separate cover.

Thank you for the opportunity to provide input into the development process for the proposed implementing regulations for Section 385, and if The Aluminum Association can be of further assistance please contact me at (703) 358-2981 or cjohnson@aluminum.org.