Honeywell Thinks Debt-Equity Regs Would Stymie Investment

Honeywell International (Honeywell), a global manufacturing and technology company headquartered in Morris Plains, New Jersey, submits the following comments on the proposed debt-stock regulations issued under Internal Revenue Code section 385 by the Treasury Department on April 4, 2016. If finalized as currently written, these regulations would have a negative impact on many ordinary business transactions unrelated to Treasury's stated goals of preventing inversions and U.S. base erosion and would severely limit our ability to Invest in the growth of our business and support jobs in the U.S. The broad application of these rules would penalize common sense corporate liquidity management practices that are necessary to efficiently manage cash in day-to-day operations and transactions and that are not tax motivated.

Two types of critical liquidity management tools -- cash pooling and intercompany loans -- are integral to the day-to-day operations of Honeywell's approximately 1,200 operating units in more than 70 countries. Cash pools are primarily used by Honeywell to concentrate surplus cash in a few locations, enabling the company to efficiently invest the cash. They allow us to leverage Treasury Center expertise to mitigate counterparty (primarily bank) credit risk, fraud risk and ensure that our cash is readily available to support Honeywell's liquidity requirements in stressed situations such as the recent financial crisis. Cash pools are also an efficient mechanism to provide short-term financing (i.e., for payroll, supplier payments, business Integration plans, and pension funding) to Honeywell's businesses around the world without relying upon unnecessary and more costly external financing. Intercompany loans are utilized to fund longer-term financing requirements (i.e., acquisitions) and in situations when cash pooling is not available to a business that has short-term financing needs. For example, cash pooling may not be possible due to undeveloped banking systems or a recently-acquired business may not have yet been fully integrated into Honeywell's cash management systems. Perhaps most importantly, these liquidity management tools eliminate the requirement for billions of dollars of unnecessary external borrowing that would materially increase interest expense and harm the metrics used by agencies that determine Honeywell's credit rating. The ability of companies like Honeywell to continue to cost-effectively manage our global liquidity not only underpins our ability to make capital investments and create jobs, but also contributes to the strength and stability of the U.S. financial system.

An inability to cost-effectively utilize these critical cash management tools would have significant unintended consequences, including a reduction in our credit capacity and a reduced ability to complete routine transactions on a timely basis. As an example, some Honeywell foreign operating units have pension obligations that need to be funded but have insufficient liquidity to make a large lump sum contribution. These operating units would normally borrow from other Honeywell foreign operating units to fund the pension contributions. However, the related party borrowing may run afoul of the proposed regulations, greatly increasing the potential cost of the internal borrowing and increasing the likelihood that these pension plans would remain underfunded for longer than would otherwise be the case. An unfunded pension plan would be counted as debt by the credit rating agencies, which in turn reduces credit capacity for U.S. investment and capital spending. This would adversely affect U.S. job creation, especially when multiplied throughout the broader business community.

The proposed regulations would recast related party debt as stock unless new documentation requirements are met. In order to comply with the rules, we ask for an additional 180 days to comply with the new (-2) documentation requirements. Honeywell complies in full with the documentation that is required currently, however, the new documentation deviates in certain respects from practices commonly employed by corporations and the proposed regulations greatly increase the consequences of an inadvertent administrative error. Therefore, companies including Honeywell will require additional resources and Internal systems that will take time to implement beyond the date when the proposed regulations are finalized.

Even if the documentation requirements are met, the proposed regulations would impose "per se" stock treatment if the debt is issued in specific intercompany transactions, or used to fund specific distributions and acquisitions. By requiring that such intercompany debt be classified as stock, the regulations would place a significant economic burden on our ability to use intercompany financing, significantly impacting finance and treasury functions, capital structure and routine funding of ordinary operations. The rule is designed such that one "bad" cash pool loan could recast all loans from the cash pool lenders as stock. It would be easy to unintentionally trigger this viral effect, creating a systemic recasting of loans as a result of a minor mistake. We therefore respectfully request a 180-day safe harbor exception for cash pool borrowing and other intercompany short term financing arrangements with an additional 180-day rebuttable presumption which places the burden of proof on the taxpayer to show that the transaction was executed for ordinary business purposes and not tax avoidance. We believe that a rebuttable presumption is necessary in order to ensure these new regulations are applied accurately, without undue harm to the taxpayer.

It is equally important to note these routine cash management activities between our foreign operating units do not impact the US tax base -- they would be undertaken regardless of the US income tax considerations. Accordingly, we believe a safe harbor exception under the (-3) portion of the regulations should be provided for transactions between our foreign related parties when those transactions remain outside the U.S. and are not subject to U.S. taxation. These regulations could also run counter to other countries' laws and therefore should allow for a safe harbor for compliance with local country law.

Additionally on the (-3) recast portion, it is difficult for a company to control and foresee all possible transactions that could unintentionally run afoul of the proposal regulations within a 6 year period. Therefore, we request a rebuttable presumption for the first and last year of the period (i.e., years 1 & 6) that would again place the burden on the taxpayer to demonstrate that the transactions were executed for ordinary business purposes and not tax avoidance.

Finally, when a company deploys its cash via intercompany debt that is deemed to fund a distribution or an acquisition, such debt is recast as stock to the extent the debt exceeds the issuer's current earnings and profits (E&P). While the rules do include a "safe harbor" for distributions that do not exceed current year E&P, this exception is flawed. Restricting the amount of cash that can be distributed to the parent company to current year E&P would be problematic because the regulations would cause a partial recast of debt as stock should the current year E&P be revised lower. Our current year E&P can only be accurately assessed once the amounts have been finalized and our tax returns have been filed. We believe the exception should be made for prior year E&P rather than current year E&P.

To summarize, Honeywell respectfully requests the following changes:

• Safe harbor from documentation rules for 180 days following finalization of regulations

• 180 day safe harbor exception for cash pool borrowing with an additional 180 day rebuttable presumption

• Safe harbor exception under (-3) recast for foreign-to-foreign lending

• Safe harbor for compliance with local country laws

• Within 6 year (-3) recast period, rebuttable presumption for the first and last year of the period (i.e., years 1 & 6)

• Exception for prior year E&P rather than current year E&P