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Danish Company Warns of Adverse Effects of Debt-Equity Regs

JUL. 8, 2016

Danish Company Warns of Adverse Effects of Debt-Equity Regs

DATED JUL. 8, 2016
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July 7, 2016

 

 

The Honorable Jacob Lew

 

U.S. Treasury Secretary

 

U.S. Department of the Treasury

 

1500 Pennsylvania Ave., N.W.

 

Washington, D.C. 20220

 

Re: Proposed Regulations under Section 385 (Reg. 108060-15)

 

Dear Secretary Lew:

As an United States investor since 1982, Novo Nordisk has serious concerns about the potential impact of the proposed debt-equity regulations under Internal Revenue Code section 385 (the "proposed 385 regulations"), released by the Treasury Department on April 4, 2016.

Novo Nordisk

Headquartered in Denmark, Novo Nordisk is a global healthcare company with more than 90 years of innovation and leadership in diabetes care. Novo Nordisk discovers and develops innovative medicines and makes them accessible to patients throughout the world. Nearly a century of innovation and leadership has led to the development of a comprehensive portfolio of products and delivery systems for diabetes care, as well as in other therapeutic areas where the company can make a difference. We are one of the world's leading diabetes care companies.

Novo Nordisk Inc. is a U.S. affiliate of Novo Nordisk A/S. Novo Nordisk's U.S. headquarters are located in Plainsboro, NJ, and U.S. business presence stretches from coast to coast with an insulin manufacturing plant in Clayton, NC, biopharmaceutical manufacturing plant in West Lebanon, NH and research centers in Indianapolis, IN and Seattle, WA. In the U.S., Novo Nordisk currently maintains a workforce of over 6,500 employees.

Novo Nordisk expansion in the U.S.

Over the past two years, the U.S. operational footprint of Novo Nordisk has expanded with decisions to increase CAPEX investment and hiring at the following U.S. locations:

Clayton, North Carolina: On March 29, 2016, Novo Nordisk broke ground on its new $2 billion U.S. production facility. The facility will produce active pharmaceutical ingredients (API) for a range of Novo Nordisk's current and future GLP-1 and insulin products. Once fully operational in 2020, the production plant will ensure capacity for diabetes care products in the U.S. for decades ahead. The new site is situated adjacent to Novo Nordisk's existing 42,000 m2 facilities which assembles and packages FlexPen® and FlexTouch® prefilled insulin devices for the U.S. market. In addition to a current, Novo Nordisk workforce of over 800 employees at the site, the expansion is expected to create an additional 700 new jobs. Also, Novo Nordisk expects to create a significant employment effect during the construction period with up to 3,000 people working on the project at its peak.

Indianapolis, Indiana: On August 27, 2015, Novo Nordisk announced that it entered into a definitive agreement under which Novo Nordisk acquired Calibrium LLC and MB2 LLC, two privately held biopharmaceutical research companies based in Indiana. Formed in 2013 and 2014, respectively, Calibrium and MB2 were focused on developing a portfolio of novel drug candidates for the treatment of diabetes and related metabolic diseases. The acquisition expanded Novo Nordisk's portfolio of projects and intellectual property rights within diabetes and obesity and provided a basis for expanding Novo Nordisk's research presence in the U.S. Some of the former key employees have accepted jobs and the Novo Nordisk workforce of highly skilled scientists at a newly formed company in Indianapolis is currently over 20.

West Lebanon, New Hampshire: On August 27. 2014, Novo Nordisk announced the acquisition of a manufacturing facility from Olympus Biotech. The facility was established in 1989, expanded in 2003-2006 and acquired by Olympus Biotech in 2011. It has been used primarily for mammalian cell manufacturing until production was phased out early 2014. Novo Nordisk will use the facility for production of active pharmaceutical ingredients primarily for its portfolio of biopharmaceutical products1. Some of the former key employees have accepted jobs and the Novo Nordisk workforce at the site is currently over 150.

U.S. investment and operational impacts

The proposed regulations, which overturn long-standing tax principles and well-established case law, destabilize existing and future U.S. investment decisions. Without notice2, the fundamental U.S. business case comparator has been compromised by raising the cost of U.S. based capital, restricting efficient treasury and transactional practices and layering even more complexity and uncertainty on top of an already challenging tax system.

Legitimate CAPEX financing: Key factors in a global manufacturing and research site selection process are cost of capital and country tax system. As a global company, Novo Nordisk values the ability to finance expansion with appropriate levels of debt and equity, and deduct related interest as an ordinary business expense in the country where investments are made. Novo Nordisk depends on the transparency of regulations in the countries in which we operate to allow for predictability and reliability of outcomes expected.

The proposed rules do not afford either predictability or reliability in that investment decisions made under existing law may now be impacted under new rules. We believe that the current rules in effect under IRC 163(j), 385 and 482 are fully effective for cross-border related party lending tied to U.S. CAPEX investment. Therefore, we urge Treasury, at a minimum, to change the effective date of the proposed debt-equity recharacterization rule from applying to debt instruments issued on or after April 4, 2016, and instead apply the rule to debt instruments on or after the date that is 90 days after the regulations are finalized. Further, we respectfully request that related party debt tied to U.S. CAPEX investment is exempted from the new rules.

Modern treasury practices: As a multinational business, centralizing day to day liquidity provides efficiency by using pooled funds to reduce financing, banking and hedging costs, enhance investment returns and to provide liquidity at local levels to ensure minimal liquidity disruptions to operations. At Novo Nordisk, physical short term, cash-pooling arrangements benefits the manner in which we manage our daily cash between U.S. entities and units, e.g., NC and NH manufacturing, IN and WA research, and NJ commercial facilities.

The proposed rules eliminate the ability for companies to engage in efficient cash pools, a practice that is not done for tax reasons and should not be eliminated by U.S. tax regulation. Therefore, we respectfully request that the final regulations are amended to address this concern. If final rules still contain provisions to prevent lending from a cash pool, we request at minimum that a safe harbor equal to U.S. affiliated tax group cash level is included. Additionally, we respectfully request that intercompany ordinary trade payables with less than one year maturity occurring in an IRC 482 "arms-length" manner are explicitly exempt from the final rules.

Documentation requirements: In meeting Form 1120, U.S. Corporation Income Tax Return requirements, contemporaneous documentation of items of income and deduction along with IRC 482 requirements are due with the annual filing on or before the statutory due date. Under Prop. Reg. Sec. 1.385-2(b)(2), taxpayers are required to document each debt instrument within 30 days after a debt instrument is issued. Further, documentation of the debtor-creditor relationship including evidence of timely interest and principal payments, e.g. wire transfers or bank statements must be provided within 120 calendar days after payment or date on which relevant event occurred.

As aforementioned documentation requirements are duplicative and onerous without adding any benefit to potential review by IRS, we respectfully request that the rule in entirety be withdrawn.

Per Se rule: A company's ability to remit current and accumulated earnings and profits ("E&P") to stockholders, to the extent allowable under local law and cash is available, is an important factor in considering investment location; this includes respecting tax treaties in regard to cross-border dividends. In the U.S., the longstanding operative tax limitation is current year and accumulated E&P. Prop. Reg. Sec. 1.385-3 places new and expanded restrictions on such dividends under both the general rule and the "per se" funding rule. Not only are distributions of dividends limited under the rule, related-party cash loans could be recast as equity within a 72 month period of a distribution

In order to afford non U.S. based investors the ability to repatriate cash under existing tax treaties, we respectfully request that the proposed prohibition of dividends is removed. At a minimum, we urge Treasury to allow for dividend repatriation to the full extent of current and accumulated tax E&P.

Closing

In consideration of global investment alternatives, we look at country costs which include the tax system. An investment is more likely to occur in a country that respects the "arms-length" principle and maintains a competitive corporate tax rate. Furthermore, countries that afford companies the ability to provide necessary liquidity via debt, equity or a combination there of, including the deduction of interest expense, are more competitive for investment. Also, the ability to accelerate CAPEX tax deductions and obtain tax incentives, e.g. R&D tax credit plays an important part in such decisions.

The proposed 385 regulations create a significant unanticipated, new cost to U.S. capital, hinder modern treasury management processes and add complexity as well as administrative burden to an already challenged tax system. With these broad rules, Treasury has impacted long-standing investors dedicated to the U.S. market. As such an investor, the proposed rules will effect both retrospective and prospective U.S. investment decisions that support or may support U.S. employment.

Accordingly, we respectfully request that our comments and all the comments to the proposed 385 regulations are intensely considered along with all collateral impacts, e.g. Foreign Direct Investment in the U.S. and U.S. tax law clarity.

For your consideration of our above requests, we thank you and would be pleased to have the opportunity to meet with you and your staff to discuss our concerns in more detail.

Sincerely,

 

 

Lars Green

 

Senior Vice President --

 

Finance & Operations

 

Novo Nordisk Inc.

 

800 Scudders Mill Road

 

Plainsboro, NJ 08536

 

U.S.A

 

cc:

Lars Rebien Sørensen, President and Chief Executive Officer, Novo Nordisk

Jesper Brandgaard, Executive Vice President and Chief Financial Officer, Novo Nordisk

The Honorable Robert Menendez (NJ)

The Honorable Cory Booker (NJ)

The Honorable Richard Burr (NC)

The Honorable Thorn Tillis (NC)

The Honorable Jeanne Shaheen (NH)

The Honorable Kelly Ayotte (NH)

The Honorable Patty Murray (WA)

The Honorable Maria Cantwell (WA)

The Honorable Dan Coats (IN)

The Honorable Joe Donnelly (IN)

The Honorable Chris Christie (NJ)

The Honorable Pat McCrory (NC)

The Honorable Maggie Hassan (NH)

The Honorable Jay Inslee (WA)

The Honorable Mike Pence (IN)

The Honorable Rufus Gifford, Ambassador of the United States to Denmark

His Excellency Lars Gert Lose, Ambassador of Denmark to the United States

 

FOOTNOTES

 

 

1 Novo Nordisk biopharmaceutical products are owned by Novo Nordisk Health Care AG, Switzerland.

2 Treasury's updated 2015-2016 Priority Guidance Plan, released February 5, 2016, did not provide notice of intent to release proposed IRC 385 regulations.

 

END OF FOOTNOTES
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